Balanced Mutual Funds - Meaning, Types and Advantages (2024)

Features of balanced funds

• Portfolio diversification: Balanced funds enable investors to diversify their portfolio by investing in a range of instruments such as equities and bonds.
• Potential for decent returns: Balanced funds have the potential to generate substantial returns since they allocate a significant portion to equities.
• Automatic portfolio rebalancing: Balanced funds are designed to automatically rebalance your portfolio, which can be advantageous during market instability. Fund managers sell equity holdings to maintain the fund's desired level and vice versa.

Advantages of balanced funds

Here are some advantages investing in balanced mutual funds:

1. Diversification: Balanced funds automatically diversify your investments across asset classes, reducing the risk associated with investing in a single asset type.
2. Risk Management: The combination of equities and debt helps manage market volatility. During periods of market turbulence, the debt component can act as a stabiliser.
3. Professional Management: Balanced funds are actively managed by experienced fund managers who make informed decisions about asset allocation to optimise returns.
4. Simplified Investing: For investors looking for an all-in-one solution, balanced funds provide a simplified way to access equity and debt markets without the need for managing multiple investment.
5. Tax savings:
   • Similar to debt funds: Balanced funds, especially those with a higher debt allocation (75% or more), are taxed similarly to debt funds. This can be beneficial for tax-conscious investors.
   • Long-term capital gains: Investments held for 3 years or more in balanced funds qualify for Long-Term Capital Gains (LTCG) benefits. LTCG on balanced funds are taxed at a rate of 20% (plus applicable cess and surcharge) with the benefit of indexation.
   • Indexation benefit: Indexation allows you to adjust the purchase price of your investment for inflation, potentially reducing your taxable capital gains. This can be particularly advantageous for long-term investors in balanced funds.
6. Protection against inflation:
   • Debt component: Balanced funds typically hold a significant portion of their assets in debt instruments like bonds and government securities. These investments offer regular interest payments, which can help hedge against inflation to some extent.
   • Equity component: While the debt portion provides stability, the equity component in balanced funds offers the potential for capital appreciation over the long term. This growth can potentially outpace inflation, helping to preserve the purchasing power of your investment.
7. Rebalancing of assets:
   • Active management: Balanced funds are actively managed by fundmanagers. These managers strategically allocate assets between equity and debt, aiming to maintain a target asset allocation.
   • Maintaining balance: Over time, market movements can cause the weightings of equity and debt in the fund to drift from the target ratio.
   • Periodic rebalancing: Fund managers periodically rebalance the portfolio by buying or selling assets to restore the desired asset allocation. This helps maintain the fund's risk profile and investment objective.

Who are balanced funds suitable for?

Balanced funds cater to a wide range of investors. They are ideal for those who:

• Are looking for capital preservation with moderate risk.
• Seek a steady income stream along with the potential for capital appreciation.
• Want a simplified investment approach.
• Don't have the time or expertise to manage multiple investment options.
• Are looking for diversification without the need to track different securities.

Taxation

Balanced funds capital gains are taxed based on their equity-debt orientation. Equity-based balanced funds (if equity component exceeds 65%) are taxed like pure equity funds. Long-term capital gains (LTCG) earned on the sale of mutual fund units after a holding period of 1 year are tax-free up to Rs. 1 lakh. LTCG exceeding Rs. 1 lakh is taxed at 10%, excluding the indexation benefit. Short-term capital gains, which are earned on the redemption of units before a holding period of 1 year, are taxed at a rate of 15%. Debt-based balanced funds are taxed like debt funds. STCG earned on investments held for less than 3 years are taxed according to one’s applicable tax slab. LTCG earned on redeeming units after 3 years are taxed at 20%, along with indexation benefits.

Disadvantages of balanced funds

1. Moderate returns: Balanced funds may not generate returns as high as pure equity funds during bull markets, limiting the growth potential.
2. Fees: Balanced funds typically come with management fees like almost other types of mutual funds, which can reduce the overall returns. types of mutual funds, which can reduce the overall returns.
3. Interest rate risk: The debt component of balanced funds is exposed to interest rate fluctuations, which can impact the returns from the debt portion.
4. Lack of customisation: Balanced funds have predetermined asset allocation ratios that may not align with your specific risk tolerance or financial goals.

How to invest in a balanced fund?

Step 1: Visit the Bajaj Finserv website or download the app from Google Play Store or App Store

Step 2: Navigate to 'Investments' and click on 'All Investments' on the home page

Step 3: Click on 'Mutual Funds' icon

Step 4: Click on 'Explore Funds'. You will be redirected to the mutual funds listing page

Step 5: Filter by scheme type, risk appetite, returns, etc. or choose from the top performing funds list

Step 6: All the mutual funds of the particular category will be listed, along with the minimum investment amount, annualised return, and rating

Step 7: Click on 'Invest Now'

Step 8: Enter your mobile number and sign in using the OTP

Step 9: Verify your details using your PAN, date of birth. If your KYC is not complete, then you will have to upload your address proof and record a video

Step 10: Enter your bank account details

Step 11: Upload your signature and provide some additional details to continue

Step 12: Choose and select the mutual fund that you want to invest in

Step 13: Choose whether you want to invest as SIP or lumpsum and enter the investment amount. Click on ‘Invest Now’

Step 14: Select your payment mode i.e., net banking, UPI, NEFT/ RTGS

Step 15: Once your payment is done, the investment will be complete

Your investment will start reflecting in your portfolio within 2-3 working days.

Things to Consider When Investing in a Balanced Fund

When contemplating investment in balanced mutual funds, several key considerations merit attention:

• Expense Ratio: Hybrid or balanced funds, like other mutual funds, entail an expense ratio. This percentage represents the fee charged by the asset management company for its services. A higher expense ratio directly impacts the overall investment cost.
• Past Performance Evaluation: Prospective investors should diligently assess the historical performance of a balanced fund. While past performance is crucial for insights, it doesn't guarantee future returns. Nevertheless, analysing a fund's track record provides a rough estimate of potential returns.
• Risk Assessment: Although balanced funds are perceived as less risky than equity funds, inherent risks persist in all mutual fund investments. Investors must carefully evaluate their risk tolerance before committing to any investment.
• Fund Manager's Expertise: Navigating funds through market fluctuations demands experience. A seasoned fund manager brings valuable knowledge to tackle market volatility and optimise returns. Investors benefit from a fund manager with a track record of managing funds effectively.

Conclusion

Balanced funds can be a valuable addition to your investment portfolio. Balanced mutual funds offer an attractive middle ground for investors, allowing them to enjoy the best of both worlds. While they may not deliver the same high returns as pure equity funds, they provide a balance between growth and stability. It is essential to assess your financial goals, risk tolerance, and investment horizon to determine if balanced funds align with your needs.

Calculate your expected investment returns with the help of our investment calculators