There are several types of mutual funds available in the market today that offer different exposure to various types of equities. These funds range from large-cap, mid-cap, small-cap to multi-cap, depending on the investment objective of the fund. On the other hand, there are various debt oriented funds that are structured to align with varying investment horizons of investors.
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The bouquet of these funds do provide freedom to investors to customize their investment portfolio as per their goals but they fail to provide active management or dynamic allocation. In simpler words, an individual will have to manually adjust his/her portfolio to keep the asset allocation intact. A bull or bear rally in equities or debt can directly alter the asset ratio, which needs constant asset balancing.
Balanced mutual funds offer a simple way to achieve desired asset allocation without compromising on returns potential. Balanced mutual fund schemes stand apart from plain vanilla equity schemes in terms of their exposure to equities. These funds invest at least 65% of their assets in equities and the remaining portion is invested in fixed income securities. The primary objective of these funds is to earn higher returns while limiting risks, hence providing a superior risk-return trade off over diversified equity offerings.
Let’s look at other associated benefits of these funds that make them suitable to be a part of any type of investment portfolio.
1) Dynamic asset allocation - These funds can increase the equity exposure in their portfolio up to 75-80% when the equity markets appear to be undervalued and can similarly cut it to the lower range as and when the market becomes overvalued. This characteristic of balanced schemes gives them an upper hand over diversified funds that come with limited flexibility.
2) At par risk-adjusted returns - Balanced funds not only shield investors from market volatilities to a larger extent but also strive to match the performance yielded by large-cap or mid-cap equity funds. Here’s a snapshot of how balanced funds have fared against equity-oriented schemes over different time horizons.
1-year
|
3-year
|
5-year
|
|
| Balanced Funds |
12.09%
|
12.19%
|
15.65%
|
| Equity - Large Cap |
14.15%
|
10.33%
|
14.76%
|
| Equity - Mid Cap |
17.27%
|
17.88%
|
23.29%
|
3) Tax advantage - Despite having exposure to debt instruments, balanced funds enjoy tax status of equity funds. Redemptions within one year of investment attract short term capital gain tax of 15% and those over one-year time frame are tax exempted. Similarly, dividends received from an equity-oriented balanced fund scheme is tax-free in the hands of investors.
Should you invest in a balanced fund?
Balanced funds should definitely be a part of your portfolio if you are a conservative investor or simply want to earn decent returns without taking too much of risk. Also, it is appropriate for investors who have little time to spare towards reviewing their asset allocation. Moreover, adding a balanced scheme to any portfolio will not hurt but only add stability.
About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.
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