Mutual fund schemes that invest in a mix of equities and debt, giving you the best of both worlds. They are ideal for investors who are looking for a mixture of safety, income and modest capital appreciation.
What are Balanced Funds and how do they work?
Balanced Funds, also known as Hybrid Funds, primarily invest in different asset classes like stocks, bonds and gold in a given percentage. It helps you to earn higher returns on investments as compared to investing in plain vanilla debt funds. At the same time, you may lower the overall portfolio risk as compared to investing in pureequity funds. The NAV of a balanced fund may go up/down based on the extent of stocks present in your portfolio. The structure of balanced funds is such that the portfolio is well-diversified by default. The fund manager would use market research to pick stocks and bonds to deliver returns as expected. Thus, balanced funds aim at growing wealth while maintaining a relatively stable portfolio.
Balanced funds have debt securities to cushion them against market swings. But at the same time, these funds are considered a bit riskier than puredebt funds. Owing to relatively higher allocation to debt instruments, Conservative Hybrid Funds have moderate risk as compared to other sub-categories. On the contrary, Aggressive Hybrid Funds have relatively higher risk on account of extensive allocation to stocks. But at the same time, these funds have a potential to generate higher risk-adjusted returns. Remember that the fund NAV may fluctuate due to changes in interest rates and stock prices. To boost returns, you may invest in Balanced Advantage Funds, wherein your portfolio would be aligned with the underlying interest rate movements. If you want exposure to multiple asset classes under one umbrella, you may go for Multi Asset Allocation Funds.
Balanced Funds offer you a healthy dose of stocks along with a cushion of debt instruments. In some cases, you can seek exposure to gold and money market instruments as well. Balanced funds may be ideal for investors who want to stay invested for a period of at least 5 years. Especially, in the case of funds which hold long duration bonds and mid cap stocks, having a long term investment horizon helps to achieve the funds true potential. Besides, a relatively stable asset allocation gives you a blend of safety, income and moderation wealth creation.
Retirees who have a moderate risk appetite may invest in balanced funds to earn inflation beating returns and to safeguard the retirement corpus. Long term investors who fall in higher tax brackets may allocate a part of their portfolio towards balanced funds which have an equity component of at least 65%. It may lower their tax liability as the long term capital gains up to Rs 1 lakh are tax-free and the gains exceeding the threshold of Rs 1 Lakh are taxed at the rate of 10%.
Before investing in balanced funds, you need to have a thorough understanding of the underlying offering. You should examine the instruments in which the fund has invested and ensure that these are in line with your risk appetite and investment horizon. A balanced fund which is heavily invested in mid caps and long duration bonds, may seem a risky proposition for someone who is seeking a safe avenue. If you are looking to preserve capital over the long term, then you may invest in a balanced fund which holds primarily large cap stocks and high-rated bonds. Along with this, you may compare the funds based on returns to look for a fund which may give a consistent performance.
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.