Guide to Invest in Balanced Mutual Funds – Benefits, Taxation, How to Choose and Invest in Them
In 2017, the Securities Exchange Board of India (SEBI) introduced a new category of hybrid mutual funds, called balanced funds. These funds were launched with the sole aim to give investors exposure to a diversified portfolio of stocks and bonds. This would in turn give them a balance of risk and potential return. So, should you invest in balanced funds?
Read this blog to get a detailed understanding of balanced funds so that you can make the right investment choice.
What are Balanced Mutual Funds?
A balanced mutual fund is a type of hybrid fund that holds a mix of stocks, bonds, and cash or cash equivalents and aims to give investors exposure to a variety of different asset classes. Though the exact composition of a balanced fund depends on the fund’s investment objective and management style, usually balanced funds hold a mix of 60% stocks and 40% bonds. This mix gives investors a balance of the higher potential returns of stocks and the stability and income of bonds.‘These funds are a more suitable investment option for risk-averse investors or those who are looking to preserve their capital.
Features of Balanced Mutual Funds
Listed below are the main features of balanced mutual funds:
- Gives investors a one-stop investment option with exposure to both equities and debt.
- Balanced mutual funds are associated with much lower risks than pure equity mutual funds due to their exposure to debt instruments.
- Balanced mutual funds aim to maintain a balance between the risk-reward ratio and optimise the returns investors receive from their investments.
- These mutual fund schemes are designed to automatically rebalance an investor’s portfolio in case of extreme market fluctuations.
Benefits of Balanced Funds
Listed below are the benefits of investing in balanced hybrid mutual funds:
1. Reduced Risk
Investing in pure equity schemes can expose investors to a higher degree of risks. However, balanced funds invest in debt instruments too, which helps reduce the risk element.
2. Rebalancing of Funds
Fund managers of balanced funds are at liberty to move across equity and debt asset classes and rebalance their portfolios. This is quite helpful, especially as a beneficial measure against market fluctuations and when equity markets are overvalued or vice versa.
3. Portfolio Diversification
Hybrid funds enable fund managers to diversify their portfolio across various types of equities, debt and money market instruments. Portfolio diversification across a varied range of asset classes not only reduces risks but also helps in capital appreciation.
4. Protection from Inflation
Balanced mutual funds act as a hedge against inflation, mainly because while the equity component generates stable returns, the debt component ensures regular and stable returns.
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Types of Balanced Funds
Detailed below are the types of balanced funds:
1. Equity-oriented Balanced Funds
Equity-oriented balanced mutual funds invest a minimum of 65% of their corpus in equity and equity-related instruments. The remaining portion is invested in debt securities or money market instruments which provide the investor’s portfolio with stability when the market is volatile.
2. Debt-oriented Balanced Funds
Debt-oriented balanced mutual funds invest most of their corpus in debt securities. The remaining portion is allocated for equities. Debt securities that these schemes invest in include fixed-income instruments such as debentures, bonds, treasury bills, government securities and so on. Fund managers of these schemes can also invest in cash or cash equivalents to lend a more liquid component.
How are Balanced Funds Taxed?
The tax implications on hybrid mutual schemes are as follows:
1. Tax on Debt-based Balanced Funds
Hybrid schemes having greater exposure to debt securities follow the taxation of debt funds.
- When an investment is held for up to 3 years, capital tax on gains are added to the investor’s annual income tax and taxed as per his/her tax slab. These profits are short-term capital gains (STCG).
- If the holding period of fund units is more than 3 years, the tax on profits is 20% after indexation benefits. Such profits are long-term capital gains (LTCG).
2. Tax on Equity-based Balanced Funds
Hybrid funds having greater exposure to equity tools obey the tax structure of equity schemes.
- In case the fund units are held for up to 1 year, the tax applies to STCG at 15%.
- When the fund units are held for more than 1 year, the tax is 10% on LTCG of above Rs. 1,00,000. Gains up to Rs. 1,00,000 are tax-exempt.
Who Should Invest in Balanced Funds?
Investors with a low-risk appetite can choose hybrid schemes to balance out their returns and risks. Investors expecting medium capital appreciation from their investment can also consider these funds.
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*Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
How to Invest in Balanced Funds?
Given below are the steps to invest in balanced mutual funds:
- Step 1: Select an AMC and open an online account with them.
- Step 2: Carry out all your KYC formalities.
- Step 3: Fill up every necessary detail in their designated places.
- Step 4: Choose the scheme you want to invest in based on your financial goals and investment horizon.
- Step 5: Transfer the required amount. You can also provide standing instructions to your bank if you wish to invest in a balanced mutual fund via SIP (Systematic Investment Plan).
Final Word
A fund house monitors the market conditions and allocates the investments of balanced mutual funds accordingly. If the market price is high, the manager invests a significant portion of assets in debt instruments. However, if the market price is low, the AMC invests more assets in equity. This means that after investment, the asset allocation alters as per market fluctuations.
FAQs
Ans: If you want to invest in hybrid funds, follow the steps below:
1. Create an online account from an Asset Management Company
2. Complete KYC formalities
3. Put the necessary information as required
4. Select the fund which fulfills your financial goals and transfer the money
5. You can contact your bank branch if you wish to invest through SIP
Ans: Debt funds are mutual funds that invest in fixed-income instruments such as corporate bonds, debentures, government bonds, treasury bills and certificates of deposits. These options lower the risks related to the investment. There are many types of debt schemes such as liquid funds, fixed maturity funds, dynamic bond funds and overnight funds.
Ans: Equity funds invest money in the shares of various companies. A fund house tries to maximise returns by spreading the investment across varying market capitalisations and different sectors. These schemes generally generate higher returns than debt funds and term deposits.
Ans: SIP (Systematic Investment Plan) refers to an investment mode in mutual funds in which an individual invests a fixed sum at regular intervals. An investor can select quarterly, yearly, half-yearly, or monthly intervals. It works based on the principles of compounding and rupee cost averaging.
Ans: Open-ended funds do not possess lock-in periods. Investors can purchase and redeem scheme units whenever needed. There is no maximum limit of investment in these funds as these funds have no maximum limit on AUM (Assets under Management).
Ans: A balanced fund typically consists of a mix of stocks, bonds and cash or cash equivalents. The ratio of these assets depends on the fund’s investment objective , however, the ratio is usually 60% equities and 40% bonds.
Ans: Due to its exposure to various asset classes, investors have the benefit of reducing their portfolio risk. Additionally, balanced funds help diversify investors’ portfolios.
Ans: One of the main disadvantages of investing in balanced mutual funds is that they usually have higher expense ratios than other types of mutual funds. Additionally, the returns on balanced mutual funds are usually lower compared to other aggressive funds.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
