Balanced Mutual Funds

Investing in various asset classes and securities is the key to maintaining a diversified investment portfolio which helps reduce investment risk. However, many investors find making low-risk investments with a high potential for returns very challenging. 

 

In such cases, balanced mutual funds can help by allowing you to invest in debt and equity instruments simultaneously. Read on to learn more about balanced mutual funds, their types, advantages and more.

Balanced mutual funds are hybrid investment vehicles that combine a diversified blend of bonds, stocks, and cash or cash equivalents. The primary goal of these funds is to provide exposure to various asset classes. 

 

Here, the allocation is based on the approach of fund management and investment goals. Typically, they maintain 60% in stocks and 40% in bonds. The allocation strikes a balance between the potentially greater returns of stocks and the stability and income from bonds. 

 

As a result, these funds are particularly well-suited for you if you are a risk-averse investor. With these funds, you can preserve your capital while benefiting from potential growth.

 

1. Equity-Oriented Funds

• Equity-oriented balanced mutual funds are hybrid investment options that allocate a minimum of 60% of their funds to equity and securities related to equities.

• The remaining portion of the corpus gets invested in debt or money market investments. This provides stability during unexpected market volatility.

2.  Debt-Oriented Funds

• Debt-oriented balanced mutual funds are hybrid investment options that allocate at least 60% of their total corpus into debt securities.

• These funds' debt component comprises fixed-income instruments such as: 

  1. Debentures

  2. Bonds

  3. Government securities

  4. Treasury bills

• Reduction of Risk

A great advantage of balanced mutual funds is the mitigation of risk. These funds address this risk by incorporating debt instruments into the mix and balancing the overall risk associated with equity investments. 

 

Relying solely on equity funds can expose you to significant risks. For instance, during the 2008 financial crisis, the NIFTY index experienced a drastic decline of 50%, leading to substantial losses for investors holding equity funds. 

• Portfolio Diversification

Balanced mutual funds offer an excellent means of diversifying your investment portfolio. By maximising returns, these funds provided a safety net against market-linked risks. Also, they offer an ideal opportunity to reduce investment liabilities. 

 

This risk management aspect is valuable since it helps protect your overall investments from drastic downturns that could result in significant losses.

• Rebalancing of Funds

As you know, market conditions change constantly, and with these changes, the attractiveness of equity and debt markets also vary over time. Balanced funds solve this problem by offering the flexibility of asset rebalancing.  

 

You can strategically reallocate your investments if equity markets appear overvalued compared to debt markets. The ability to rebalance the asset allocation is a key advantage of these funds since it allows you to capitalise on potential opportunities.

• Safeguards from Inflation

Balanced funds also act as a safeguard against the effects of inflation. Including debt assets in your investment portfolio helps cover the impact of rising prices on your overall purchasing power. 

 

When inflation rises, the value of money reduces, diminishing the worth of investments dominated in fixed currencies. By holding a portion of the balanced fund in debt instruments, you can preserve capital and generate a stable income flow with a lower chance of experiencing inflation.

Like other mutual funds, balanced mutual funds are also associated with some tax implications. Know the tax implications here.

1. Tax on Equity-Oriented Balanced Funds

• Since the proportion of equity is greater in equity-oriented balanced funds, they get treated as equity funds for taxation. If the holding is for less than a year, they are considered short-term capital gains (STCG) and taxed at 15%. 

• If the holding is for over a year, they are considered long-term capital gains (LTCG) and taxed at 10%. Remember, if the gains are less than ₹1 lakh, you do not need to pay tax.

2. Tax on Debt-Oriented Balanced Funds

• Debt-oriented balanced funds have a major proportion of debt, so they get the treatment of debt funds. Short-term capital gains (STCG), which are holdings of less than 3 years, are taxed as per your income tax slab rate. 

• For long-term capital gains (LTCG), you need to pay 20% as tax and you get indexation benefits. Investments in balanced or hybrid funds have become highly popular lately since they offer the best of both worlds. 

 

If you are a first-time investor, choosing balanced funds can serve as a solid starting point for your investments.