What are Balanced Funds in ULIPs?

Unit Linked Insurance Plans (ULIPs) are a type of insurance product available in the Indian market. With ULIP plans, you get dual benefits – investment as well as insurance. A part of your premiums is used for life insurance coverage and the remaining portion is invested in funds of your choice.

You either get to choose to invest in equity funds, debt funds, or a combination of the two. This combination is known as balanced funds. Let us understand more about what a balanced fund is.

What Is A Balanced Fund?

A balanced fund in ULIPs work as a combination of equity and debt funds. Here, the money is divided between these two funds in a pre-determined proportion. The primary objective of a balanced fund is to diversify your investments to stocks and fixed income securities.

In simple words, your money will be invested in multiple investment instruments to lower the risk. So, if you feel that you are not earning desired returns on your investments, you can choose to switch your money in fixed income securities. The idea is to have an investment to fall back on in case the equity-oriented funds do not perform well in the market.

A balanced fund is appropriate for investors with a medium-risk appetite. If you are among the people who want to build their wealth over time, along with certain measures of safety taken into consideration, then a balanced fund is the right investment strategy for you. Now that we’ve explored what a balanced fund is, let’s also find out how a balanced fund works.

How Does A Balanced Fund Work?

Like we mentioned above, a balanced fund comes with a pre-determined proportion on equity and debt funds distribution. For instance, the balanced fund in ULIP plans could be 50:50 in equity to debt allocation with an option to go 10 percent over the pre-set limits depending on the market performance.

In other words, it means that if there are any market fluctuations and the fund manager anticipates losses; they can shift your investments in debt funds up to a maximum of 60% of the total assets. Hence, you (the investor) can sit back and allow your fund manager to control your investments across different asset classes and build your wealth.

In the absence of balanced funds, you will have to not only keep track of market fluctuations but also make necessary switches from equity to debt and vice versa. It will thus consume your time, efforts, and research capabilities.

Features of Balanced Funds

Mentioned below is a list of features of balanced funds which will help you in understanding them better:

• A balanced fund reduces the risk involved as an investor invests in a balanced ratio in both equity and debt shares.

• The fund manager can adjust the portfolio of the fund according to the market condition in this type of investment.

• The risk involved in a balanced fund is lower than pure equity funds but the returns of a balanced fund are not guaranteed.

• You cannot rely on the dividends of a balanced fund for regular income as they are dependent on market conditions and the fund manager’s skills.

• Investing in a balanced fund means that your portfolio is diversified. This is because your money is invested in different instruments like equities and bonds.

• In the case of bearish markets, these funds function to automatically re-balance the investor’s portfolio. This in turn allows the fund manager to even sell the equity funds to maintain the fund’s highest level.

Types of Balanced Funds

Balanced funds are broadly classified into two different categories. These categories are as follows.

• Debt Oriented Balanced Funds:

The major chunk of the assets are invested in debt securities of a company. It involves relatively low risk as it carries the ability to generate consistent returns in the long term.

• Equity Oriented Balanced Funds:

In this type, a major chunk of assets is invested in equity and its derivatives. These funds give you aggressive capital appreciation with a comparatively low focus on generating interest income from debt instruments.

 Balanced Funds: Key Advantages

There are certain advantages of a balanced fund. Let’s have a look at it.

 

• Reduction of Risk:

You should note that the investments done in equity markets are high on risk. In extreme conditions, the whole market can also crash by a huge magnitude. On the other hand, the debt markets are relatively low on risk as debt instruments tend to deliver fixed returns. In such a scenario, the investments made in debt can be increased to balance out the performance of the fund and decrease the risk.

• Portfolio Diversification:

Investing in a balanced fund gives diversification in the form of a single fund. With investment done in varied assets, the fund managers have the option of maintaining a diversified portfolio.

• Higher Returns:

A strategic blend of investments in debt and equity securities makes balanced funds much less susceptible to the volatility of the market. Equity investments of the fund assist in the appreciation of capital, at the same time as debt components guard the investments against the volatility of the market while extracting excessive returns.

• Re-Balancing:

In some cases, the equity market is overvalued as compared to the debt market, and vice versa. In such situations, fund managers have the freedom to shift between the two asset classes and balance the performance of the fund with market fluctuations. However, you should note that it is only possible when investing in balanced funds.

Who Should Invest in a Balanced Fund?

Balanced funds are ideal for people with a limited risk appetite as they can manage the loss incurred to some extent. When it comes to investors with a high-risk appetite, they are well-versed in managing equity-oriented investments and take advantage of their growth potential.

So, if you are an investor who wants to control the risk incurred as well as invest in long-term ULIP benefits, then balanced funds can be a useful investment instrument for you.

Taxation

Any balanced funds that have a share of more than 65% in equity are taxed as equity funds. For less than a one year period of holding, gains in the balanced funds are taxed at 15%. For more than 1 year of holding period, the tax slab is at 10% for gains in a balanced fund over ₹1 Lakh. You do not have to pay any tax on capital gains of up to ₹1 Lakh on investment in balanced funds. Dividends on the balanced funds are liable to a TDS of 10% if the dividend amount is above ₹5,000 in a FY. Additionally, the dividend earned will also be a part of the taxable income and thus it will be taxed at the hands of the investor.

Things to be Considered

There are certain important things that you should consider before investing in a balanced fund. They are as follows:

 

1. Set your investment goals and objectives straight before investing in a balanced fund.

2. Research well and consider all the risks involved while starting a balanced fund.

3. For risk-averse investors, a balanced fund with a heavy investment in mid-caps and longer duration bonds may not be a good option.

4. You should also compare the funds based on returns given in the past and their performance, especially in market fluctuations.

How to Invest?

You can invest in both offline and online modes. Here is a look at both ways:

 

• Offline Mode:

If you do not have the proper knowledge about the market or the balanced fund, you can invest with the help of a broker. However, investing through a broker may give you lower returns. To invest independently in offline mode, you can visit the nearest branch of the AMC of your fund with required KYC documents, cancelled cheques, and passport size photos.

• Online Mode:

You can visit various online investment platforms like Bajaj Markets to invest in balanced funds offered under unit-linked insurance plans. Skip the actual visit to your branch and also save out on the brokerage by opting for this method.

Conclusion

Those planning to invest for the long term to buy a house or for a child's education, dream wedding, and so on, but do not have the high-risk appetite, can choose to invest in balanced funds. At any time, you can switch the funds from debt to equity and vice versa depending on the market performance.

If you want to invest in a unit-linked insurance plan, head to Bajaj Markets. With Bajaj Allianz Life’s exclusive plans available on Bajaj Markets, you can take advantage of dual benefits, build your wealth over time, enjoy ULIP tax-benefits, protect yourself and loved ones, and more.

So, don’t wait. Invest in unit-linked insurance plans with us, right away.