A mutual fund is a long-term investment tool that has good returns. It offers the benefit of professional management and diversification of portfolios. In a mutual fund, you can choose between equity and debt instruments according to your risk appetite and financial goals. .
Find out what a balanced fund is, its types and its benefits.
What is a Balanced Fund Definition?
A balanced fund is a type of mutual fund or a unit-linked insurance plan where investment is made in different assets in an adequate ratio. It ensures a balance between debt and equity in a single portfolio and offers a diversification of assets.
A balanced mutual fund involves low risks as it involves investment in both stocks and fixed income tools such as bonds and government securities. With an appropriate level of equity investment funds, fixed income tools give security during market downturns.
What is the Purpose of a Balanced Fund?
An equity investment fund consists of 85% of the assets invested in equity or stock. On the other hand, debt funds involve a similar percentage of assets invested in fixed income tools and bonds. This distribution of assets may not suit every investor. So, if you are looking for a more balanced ratio of assets, you may choose a balanced fund. Thus, the purpose of a balanced fund is to strike a balance between equity and debt.
What are the Types of Balanced Funds?
The different types of balanced/hybrid funds available in the market are as follows:
Equity-oriented balanced funds
A balanced fund does not allocate assets in a typical 50:50 ratio. Instead, the investment is biased towards equity. So, balanced funds are usually equity-oriented, with more than 50% of assets invested in equity.
Debt-oriented balanced funds
Debt-oriented funds are suitable for people with a low-risk appetite as they carry decreased risk. However, they offer returns that are not that much good as equity-oriented balanced funds. They invest a major part of their assets in debt-related securities.
Monthly investment plan
While the equity-oriented balanced fund is skewed towards equity funds, the monthly investment plan (MIP) is biased toward fixed-income tools and bonds. Also called debt-oriented balanced funds, MIPs involve only 20-35% of assets in equity funds or less. Also, in MIPs, you can choose between monthly, quarterly, half-yearly or annual dividend payments.
Arbitrage funds are equity-oriented funds that use the arbitrage strategy. The investments are spread between future and spot prices of stocks in the derivative market and cash. The fund manager intends to benefit from the difference between these two markets. If profit opportunities are not present, the fund manager looks for money market instruments or cash/cash equivalents.
Benefits of Balanced Funds
Here are the top benefits of balanced funds:
Diversification: Investment in the financial market must be diversified to generate high and stable returns. Balanced funds provide a well-diversified portfolio with both equity and debt in sufficient ratios. So, hybrid funds are less risky than pure equity funds with a perfect balance between assets.
Switching between funds: Balanced funds offer you the benefit of switching between equity and debt according to risk appetite and market volatility. So, if the market is bullish, you can switch toward equity and debt instruments when the market is bearish.
Income and safety: Balanced funds are a perfect combination of debt and equity, which helps generate stable income along with investment safety.
Professional management: The fund managers manage the portfolio and make necessary changes in the equity-debt ratio. When the market is bullish, they transfer funds from debt to equity and vice versa. So you do not have to worry about managing your portfolio while investing.
Tax benefits: The equity-oriented funds qualify as equity investment funds for tax*ation purposes. So, the capital gains on the equity-oriented balanced funds in India are tax*-free if held for more than one year. But if the gains in balanced funds held for more than one year exceed ₹1 lakh, they are taxed at 10%.
In debt-oriented funds, if the fund is held for a period of more than 36 months, then long-term capital gains tax is levied. This can be at 20% with an indexation benefit. If held for less than 36 months, short-term gains tax is levied as per the tax bracket that you fall into.
ULIP Investment Balanced Funds
Unit-linked insurance plans involve investment in equity, debt or a hybrid of both. So, a ULIP plan is structured like a balanced or a hybrid fund where the premiums you pay are invested in equity and debt in pre-determined ratios. They offer flexibility to switch between stocks and debt according to market volatility and investment needs.
Who Should Invest In Balanced Funds?
A balanced fund is an ideal choice for investors having a low risk-taking ability. Investors who lack market experience can also gain from balanced funds.
So, individuals who wish to generate handsome returns along with investment security can opt for hybrid mutual funds. Also, if you want to gain from tax* benefits, balanced funds are a good investment option as equity investment is above 60%.
Things to Consider
Before you plan to invest in balanced mutual funds, you must consider the following things:
Analyse the objective of your investment.
Analyse your risk appetite and invest accordingly in equity-oriented funds or others.
Compare different funds based on their returns. So, select the funds that have a consistent performance.
Now you know the balanced fund’s meaning and how it works. So, if you are a novice investor, a retiree or aim for dual investments, a balanced fund is the perfect solution. With a diversified pool of assets, a balanced fund is founded on the perfect balance between equity and debt. It also balances the investment risks and returns in a proper manner.
ULIPs offer you the benefit of a life cover along with a balanced fund. With a professionally managed portfolio, you can stay relaxed with no need to build a diversified fund on your own. As you stay for a longer duration, you can switch between stock and debt based on your risk appetite. So, start investing in a ULIP plan with Tata AIA Life insurance and avail multiple tax* benefits. Also, you can choose between 11 fund options depending upon your risk tolerance.