Balanced Mutual Funds are Mutual Funds with a combination of Equity and Fixed income securities which aim to generate growth, minimize risk and provide regular income. During volatile market conditions and economic uncertainties, the Debt component in Balanced Mutual fund protects the capital while providing fixed returns. As and when economy recovers the equity portion contributes to the growth of the capital. To avoid risk concentration, the allocation into equity and Fixed Income instruments are diversified both in terms of sectors and companies.
How a Balanced Mutual Fund helps you:
With specific fund category like equity mutual fund (which usually allot almost all of the funds to Equity) there are chances of losing returns during downtrend and volatile times in markets. At these times, Equity Oriented Balanced Mutual Funds (Equity Hybrid funds) with minimum Equity component of 65% can be looked into, as these funds auto balance into equity and fixed income instruments in defined limits.
In complete debt funds, though there is low risk for capital invested, investors might miss the growth opportunities in the Equity segment when markets rebound. Along with safety, the growth in the capital is also important as allocation of Capital into any particular instrument with no growth prospects is going to lose it’s buying value over a period of time because of inflation. As and when the economy rebounds with improvement in various macroeconomic factors (Inflation, currency values), the underlying Equity markets and Equity instruments start growing. In these times, Equity component in the Equity Hybrid fund helps the growth of the capital and generates more returns than a pure Debt fund.
Fixed income instruments (bonds & money market instruments) can be either long term or short term and usually have fixed rate of returns.
How a Fund Manager works with a Balanced Mutual Fund:
Investment into various securities depends on the fund manager. With option to exit and allot the funds as per the market conditions Fund manager also has auto reallocating and rebalancing option, adjusting as per market conditions. Like , fund manager allocating significant amounts to debt component during volatile times and allocating more to equity in growth opportunities phase (in predefined limits). Suppose in a Equity Hybrid Fund, the equity portion goes above the minimum level, in a volatile market, the Fund manager looks to decrease the Equity allocation by diversifying into Fixed income instruments. When market trend is upward or when growth opportunities are available, fund manager allots most of funds into Equity for generating growth. In this way, the capital and returns are protected and at the same time generate a regular income.
Taxation of a Balanced Mutual Fund:
Equity Oriented Balanced Mutual Fund: Long term capital gains (more than 1 Year) are tax free but short term capital gains ( less than Year) attract a tax rate of 15% on gains irrespective of an Individuals’ tax slab.
Debt Oriented Balanced funds: Long Term Capital gains (more than 1 Year) are taxed at 10% (without indexation) benefits or 20% (with Indexation). Short term capital gains (less than 1 year) are taxed as per an Individuals tax slab.
These funds are suitable for investors with long term horizon and who are first time investors with zero knowledge on capital markets.
It is in the long term that the true value of a good Equity Hybrid fund is unlocked. Investors who look for regular income can choose the Debt Oriented Balanced fund.
Checklist to buy a Balanced Mutual Fund:
Not knowing the important parameters of the fund is the major risk. So below are few of the important aspects to be looked into before taking a call on Balanced Mutual fund.
- Check the expenses ratio of the particular Mutual fund scheme and the track record of the fund manager.
- Choose the funds with good track record and having a history of three or more years.
- Look for funds with good sizable Assets Under Management (AUM).
- Check out the ratings given by reputed rating agencies but, relying purely on the rating agency is not advisable. Seek professional help along with rating advice.
- Periodical monitoring and review of the fund chosen by the investor is advisable.
Various types of Balanced funds follow different asset allocation strategies and generate returns depending on how their individual security classes perform. So, Investors have to avoid mutual funds exposed to high risk sectors and securities like Equity Derivatives.
It is always advisable to take professional help right from choosing a good balanced fund till the time of exit along with periodical review and assessing the performance of the fund.
It is also advisable to take SIP (Systematic Investment Plan) approach to enter into any mutual fund as it helps investor to have a disciplined investment style