Balanced Mutual Fund: Overview, Benefits and Taxation

Mutual funds

A balanced fund is a relatively newer category of hybrid mutual funds. This open-ended scheme benefits from interests and stock price appreciation. It came to be known in 2017 after the reclassification of mutual funds by SEBI.  

Keep reading this page to assess the balanced schemes in the market before you make an investment decision!

What Are Balanced Mutual Funds?

Balanced funds have the opportunity to invest in both debt and equity. As per SEBI norms, a hybrid fund can invest 40% to 60% of its corpus in debt and 40% to 60% in equity. 

For instance, if the fund manager, Mr Kapoor, is bullish on stocks, he can invest 40% in debt and 60% in equity. If he is bearish on equity, he can invest 50% or 40% in equity and the remaining in debt. These schemes are not permitted to invest in arbitrage facilities. 

Since Mr Kapoor has the freedom to move between debt and equity depending on his outlook, he will also book gains periodically to reorient the portfolio.    

Benefits of Balanced Funds

Rebalancing asset allocation

There are situations when an equity market is overvalued compared to a debt market. In such times, a fund house has the liberty to shift across debt and equity and adjust the scheme’s performance against market swings. 

Risk mitigation

Investments in equity schemes attract higher risks than hybrid funds when the equity market falls heavily. The debt percentage in balanced funds helps managers reduce the equity component risk.    

Diversification

Balanced mutual funds provide diversification under a single fund scheme. Managers can maintain a portfolio having various asset categories such as debt, equity and money market securities. Diversification across asset categories contributes to risk reduction and capital appreciation. 

Protection from inflation

Hybrid schemes are popular for their distinct asset allocation, where the equity component offers better returns and the debt component provides regular income. Hence, these funds serve as a barrier against inflation.

Also read: Detailed Breakdown Of Aggressive Hybrid Mutual Funds In India

Who Should Invest in Balanced Funds?

Individuals with low-risk appetites, such as retirees, can choose hybrid schemes to balance out their returns and risks. Investors expecting medium capital appreciation from their investment can also consider these funds. 

Equity schemes usually obey variable asset allocation as per market conditions. Balanced mutual funds follow the asset allocation rules of equity funds and never violate the mandated norms. That is why hybrid mutual schemes tend to generate higher yields from their equity proportion during the bullish market. 

If you are looking for hybrid funds for fewer risks, take a look at Navi Equity Hybrid Fund. It invests primarily in stocks with at least a 25% allocation to FD-like instruments to generate steady returns in the long run. To invest, you can go to popular platforms such as Zerodha, Groww, Paytm Money and INDmoney and select Navi’s mutual funds.

Taxation

The tax implications on hybrid mutual schemes are as follows:  

a. 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). 

b. 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. 

Also read: Open-ended Mutual Funds 

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.

Frequently Asked Questions    

Before you go…

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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.