When picking a mutual fund to invest in, a common dilemma that every investor faces is whether one should invest in high-risk, high-return equity funds or low-risk, low-return debt funds. Typically, investors with moderate risk appetite divide their funds and invest in both these asset classes separately. Yet, there is a simple way to enjoy the benefits of both equity and debt investments under the same umbrella via a balanced fund.
Balanced mutual fund meaning
Balanced mutual funds invest in both equity instruments like shares, and debt instruments such as bonds. In some cases, the funds also hold some percentage of money market instruments. Hence, a balanced fund comes under the Hybrid-fund category.
Below are the 4 key reasons to choose Balanced mutual funds as a viable investment option:
1. Benefits of both worlds: A balanced fund enjoys the benefits of high-return equity investments and the stability of debt instruments. This way, one enjoys lower down-side risk as compared to traditional equity investments, and better long-term return potential than debt instruments.
2. Strict checks in place: Every balanced fund has a set mandate on the percentage of equity and debt that they are allowed to invest in. These funds are allowed to invest a minimum of 40 percent and a maximum of 60 percent in both asset classes.
3. Reduced volatility: As balanced mutual funds have substantial debt investments in place, it reduces the volatility that one associates with equity instruments. This way,
4. Moderated Risk: Given the mandate put in place for the percentage of equity and debt instruments held, balanced funds are always kept from taking too risky or too conservative a position. This differs from other aggressive-hybrid like balanced advantage funds that can invest up to 85 percent in equities. The 40-60 percent band for balanced funds makes sure that none of the asset classes are overly invested in. Hence, it is an ideal instrument for an investor who can take moderate risk.
How they are taxed
It is important to note that balanced funds are taxed as per equity norms. Hence, if ideally held for more than a year, a balanced fund’s gains would be taxed at 10 percent over a gain amount of Rs. 1 Lakh.
Thus, if you want reduced volatility as well as relatively stable returns in the long run, a balanced fund is a good option to consider. Such a fund is a good tool to have in one’s portfolio in order to meet one’s long-term financial goals while taking lower risk when compared to other pure equity instruments. This provides a cushion during market volatility, while not compromising too much on one’s long-term returns.
Share your Name and Mobile Number with us and get started