Balanced Mutual Funds

What is the Purpose of Balanced Mutual Funds?

Balanced mutual funds are hybrid funds that serve two purposes. The first is to offer exposure to growth that protects your purchasing power by investing in equity. The second is to protect your money and bring in some balance by investing in debt. As the name suggests, a balanced fund balances out risk and returns, ensuring capital appreciation and safety against probable risk. 

Balanced mutual funds are suitable for investors with mid to long-term financial goals and a low-risk appetite. While these funds offer growth and help to counter inflation because of the equity component, they do not add too much volatility that can be stressful or hard to handle for risk-averse investors. 

They can also be a stepping stone for novice investors who are hesitant to invest directly in equity funds. 

Taxation on Balanced Funds

Tax on balanced mutual funds is determined on the basis of the fund’s allocation. If the fund has at least 65% of its assets invested in equity and equity-related securities, they are taxed as equity funds. On the other hand, if the balanced fund invests most of its assets in debt securities, it is taxed as a debt fund. Here’s how each of these is taxed:

Equity Balanced Mutual Funds: 

• Hybrid funds held for a year or more are taxed as long-term capital gains at 10% on gains exceeding Rs 1 lakh

• Hybrid funds held for less than a year are taxed as short-term capital gains at 15%

   

Debt Balanced Mutual Funds: 

• Hybrid funds held for three years or more are taxed as long-term capital gains at 20% with indexation

• Hybrid funds held for less than three years or more are taxed as short-term capital gains at the prevailing income tax slabs

Advantages of Balanced Funds in Mutual Funds

• Balanced Returns

 By investing in equity and debt in a hybrid manner, investors get steady returns and controlled risk, thereby balancing their returns.

• Tax Benefits

• Shifting between equity and debt funds can typically trigger tax liabilities. However, the jump from debt to equity within a balanced fund does not attract any tax.

   

• Diversification

Balanced mutual funds offer the perfect blend of debt and equity in the portfolio, automatically diversifying the portfolio. Since the asset allocation of these funds is dynamic, investors get to make the most of the prevailing market opportunities.

• Hedge Against Inflation

The equity component of a balanced fund protects investors from rising prices by delivering returns in tandem with inflation. Additionally, the debt component provides a hedge against inflation.

• Suitable for Beginners

A balanced fund is managed by a professional fund manager who makes all critical buying and selling decisions. Beginners lacking market expertise can leverage the professional’s acumen and earn profits.

How Does a Balanced Mutual Fund Work

A balanced mutual fund combines two key components that serve distinct functions. Firstly, its equity portion aims to preserve purchasing power and requires lower capital investment, focusing on established dividend-paying companies. 

To mitigate equity risks, balanced funds allocate the remaining corpus to debt-oriented schemes. These include bonds and like debt securities, which offer stability and a steady income stream, countering portfolio volatility. Debt securities, being more secure than equities, provide a cushion against market fluctuations.

Balanced mutual funds are well-suited for investors seeking steady growth with lower risk tolerance. They provide stable income and are ideal for meeting long-term financial goals while balancing risk through diversified investments across equity and debt markets. This approach appeals to those looking for consistent returns and a reliable source of revenue.

In essence, a balanced mutual fund offers a blend of growth potential from equities and stability from debt, making it a good choice for conservative investors aiming for steady capital appreciation and income generation.

How to pick the right balanced fund?

Balanced funds are excellent investment options for those who lack the time or expertise to choose asset allocations on their own. A plethora of options are available on the market, each with different advantages. 
 

Before choosing, it is essential to clearly understand what the fund is offering. You should also have a clear risk appetite and objective in mind. Examining the instruments the fund has invested in can tell you if they align with your financial goals. 
 

For example, those wanting less risky investments should avoid balanced funds that invest heavily in mid-caps and long-duration bonds. Individuals wishing to preserve capital over time may want to invest in balanced funds that hold large-cap stocks and high-rated bonds.