About Balanced Mutual Funds
Balanced mutual funds are the investment options that offer exposure to both equity and debt funds. They are also known as hybrid mutual funds. As the name suggests “balanced” they maintain a balance between both equity and debt segments.
They provide best risk reward balance and help to maximize the returns on investments. They invest in both equity and debt segments in specific ratios. They are equally oriented. They invest with an objective of both income and capital gains. These are mainly for retired persons or investors seeking to maximize their capital with minimal risks.
TAX IMPLICATIONS :
- For Equity Oriented Scheme:
The equity oriented mutual funds that invest more than 65% of its assets in equity funds, come under this category and are subjected to taxation. Tax is applicable if the capital gain exceeds Rs. 1lakh in total. These funds are liable to pay 15% tax for short term capital gains and 10% tax for long term capital gains.
- For Debt Oriented Schemes:
In the debt oriented schemes that invest a major portion of their assets in debt funds, are subjected to 20% taxation on short term capital gains. Long term capital gains are considered if the investors hold these funds for more than 3 years.
Since the balanced funds invest in both equity and debt segments they serve two different purposes. The equity segment of the scheme mostly invests in stocks or shares, hence they help to increase the purchasing power of the investor by beating inflation. To balance out the risks of investment in equity funds, the balanced mutual funds invest the rest amount in debt funds. The debt segment of the scheme invests mostly in bonds, and other debt securities. This segment provides lower returns than the equity segment, but they are helpful as they serve two purposes. They provide a regular income source that supports the current needs of the investors and they also cover up for the volatility of equity funds. They help investors with a steady source of income as well as capital gain at the same time.
Thus, in case of taxation equity oriented schemes get some advantages than debt oriented schemes.
3. Combination of debt and equity schemes
A strategic combination of debt and equity schemes makes the balanced funds less prone to market volatility. Instead of directly investing in the stocks and various debt securities, investors can invest in balanced mutual funds, this helps in tax planning as well as growth of the wealth. This investment option is best suited for the newbies who are investing in mutual funds for the first time. Also, investors with low risk tolerance can invest in balanced mutual funds and balance out the risks of equity investments and enjoy the stable returns from debt investments. There are times when the equity market is overvalued than the debt market and vice-versa. In this case, balanced mutual funds help the investors to earn more between the two asset classes. They widen the investment portfolio and present investors with the perfect option to limit their incest liabilities. Since a portion of the balanced funds consists of the equity segment, they act as an inflation barricade. Also, these funds allow investors to withdraw money from the funds periodically without any alterations to asset allocation. Hence, these are low investment schemes that maximize returns on investments while safeguarding the investors against several market risks.
Over two-third of the portfolio is invested in the equity segment which acts as a wealth building vehicle in the long run.
Benefits of Balanced Mutual funds:
- Also, the losses of the equity segment is covered by the debt segment. And this re-balancing is done by fund managers who are experienced professionals in this field.
- Hence, you don’t have to worry about the losses personally. Balanced mutual funds rarely have to change their allocation ratio as they tend to have a lower expense ratio.
- On the downturn, the asset allocation is done by the fund managers, that may not always match the proper tax planning moves.
- Also, the asset allocation might not suit your financial goals, needs or preferences. Hence, it is advised to analyse your financial goals and risk profile at first.
- Then you can trace the historical performance of the fund house and choose to invest wisely as the top balanced funds, generate higher returns from the market from its equity segment in bull run and also prevent the degradation of funds from its debt segment during the bear run.
- Certainly, balanced funds are a way better option than other mutual funds as they are safe as well as provide best returns on your investments and widen your investment portfolio all at the same time.
Basically, Balanced funds are best suited for retired persons who are not in a position to take more risks as well as are in need of a steady income source. It is a best alternative for fixed deposits and other fixed income schemes.