Balanced Funds: Meaning, Types, Advantages and Disadvantages

Mutual funds are famous for offering multiple investment options. Balanced funds are a new category of mutual funds that came into existence in 2017 after the re-categorisation of mutual funds by SEBI. Typically, a balanced fund invests 70% of the corpus in equities and the remaining in bonds.  

What are Balance Funds?

Balanced funds offer stabilities to your investment by limiting the downside of equity investment by investing in debt instruments. At the same time, it generates higher returns than debt funds through capital appreciation in equities. It is a hybrid fund that includes a mixture of growth and money market instruments. 

A blanched fund, also called a blended fund, offers investors a balanced portfolio consisting of equities and bonds. It allocates a large portion of funds into equities to generate returns through capital appreciation in the bull market and a comparatively smaller fund into the bond market. The aim is to provide the right risk-reward balance. 

Investors of balanced funds enjoy the best of both. Balanced funds increase the investors’ income through capital appreciation but provide a cushion from debt tools. Alternatively, it generates more revenue than plain vanilla bonds.   

Usually, the asset allocation is 70:30, where 70 percent of the corpus is invested in the equity market, and the remaining 30 percent is invested in bonds. 

These funds are best for investors with a long-term investment horizon. Balanced funds are pretty good for you if you don’t want to allocate assets actively and are wary of high market volatility.

Difference between balanced funds and hybrid funds

Investors are sometimes confused if balanced mutual funds are a type of hybrid funds or if they are different. Here is a comparison between the two.

• Balanced mutual funds are a subcategory of hybrid funds. 
• Hybrid funds allocate funds into different asset categories in a golden ratio of debt and equities. These funds are equity-oriented or debt-focused based on asset allocations. Balanced funds are equity funds where significant funds are allocated in equities. 
• SEBI defines balanced funds. For a fund to qualify as a balanced fund, at least 60% of capital should be invested in equities.
• Balanced advantage fund is a subcategory of hybrid fund where the fund is dynamically managed and shuffled between different asset classes depending on changing market conditions. But in a balanced fund, the capital allocation remains fixed at a 60:40 ratio between equities and bonds, providing narrowed flexibilities.

Types of Balanced Funds

Balanced funds can be categorised into two major categories.

Debt-oriented balanced fund

Debt-oriented funds have a higher allocation of the fund’s corpus into various fixed-income securities, like bonds, money market instruments, and other low-risk assets. The remaining portion is allocated to various equity and equity-related securities.  

Equity-oriented balanced fund

Equity funds predominantly invest in equity-related securities to generate capital appreciation. The remaining portion is allocated to various debt and money market instruments, including G-sec, treasury bills, corporate bonds, commercial papers, etc.  

Besides these two major categories. There are various other types, some of which are:

• Asset allocation funds: In asset allocation funds, the fund manager will dynamically adjust the fund’s allocation according to the suitability of the market condition. 
• Global balanced funds: Global balanced funds invest in a mix of domestic and international securities. These funds provide exposure to markets outside the country, offering diversification benefits and potential growth from different economies.
• Income-oriented balanced funds: These funds focus on generating regular fixed income for investors. Income funds invest in high-yielding fixed-income securities.  
• Growth-oriented balanced funds: These funds allocate a larger portion to equities while a smaller portion is invested in fixed-income securities. It is similar to an aggressive balanced fund. The target is to generate capital appreciation in the long run. 

How are Balanced Funds Taxed? 

Balanced funds are taxed according to the asset allocation of the fund.

Equity-oriented balanced funds

Equity-balanced funds with an investment ratio of more than 65% fall under this category. These funds are liable for a tax of 15% on short-term capital gains when the holding period of the investment is less than 12 months.

If investors’ holding period is more than 12 months, the long-term capital gain of 10% will apply at the time of redemption.  

Debt-balanced funds

Debt-oriented balanced funds are taxed following the tax rules of debt funds. After the new changes in the tax rules, short-term capital gains from debt-balanced funds are taxed as per the investor’s income tax slab rate. If the holding period exceeds 36 months, a 20% long-term capital gain tax is levied on the capital gain. 

What Is the Purpose of a Balanced Mutual Fund?

These are the primary benefits of investing in balanced mutual funds.

1. Taxation benefits: The Fund managers provide the benefit of switching your fund from debt to equity or vice-versa without presenting you with any tax implications. If investors move their funds from one scheme to another, it attracts capital gain tax. For instance, if one shifts funds from a debt fund to an equity fund, it can attract a 30% tax if the holding period is less than 3 years.
2. Risk reduction: Investing in equities can be risky. Balanced funds have debt instruments to balance the risk presented by the equity component of the fund
3. Rebalancing benefits: Balanced fund managers can dynamically adjust the fund’s allocation based on market conditions for better risk-adjusted returns. 
4. Portfolio diversification: These funds offer excellent opportunities to invest in an inherently diversified portfolio. Since these funds try to earn the maximum returns while providing stability from debt investments, they provide excellent options for investors to limit their investment liabilities.   
5. Protection from inflation: A portion of the balanced fund invested in debt securities can provide an inflation hedge.  

How To Invest in Balanced Funds?

Investing in Balanced Funds can be a straightforward process using your Angel One account. Here’s a guide on how to do it:

Step 1: Access Your Angel One Account

Start by logging into your Angel One account using your registered mobile number. Validate the OTP received and enter your MPIN. Open the Mutual Fund section in the Angel One platform.

Note: If you don’t already have a Demat account with Angel One, you can easily open one by completing the KYC procedure and providing the required documents.

Step 2: Choose the Right Fund

Now, it’s time to pick the most suitable mutual fund based on your financial goals and risk tolerance. You can find various funds in the mutual fund section on the Angel One app. Here are some considerations during this stage:

• Search for the specific fund you want to invest in or explore funds recommended by Angel One across different categories.
• Analyse the fund’s historical performance, tax implications, sectors it invests in, and the stocks it holds.
• Calculate potential returns using the provided calculator.
• Assess the fund’s risk level and compare it with your own risk tolerance.
• Check the fund’s ratings from well-known rating agencies, which typically range from 1 to 5.
• Consider the fund’s expense ratio to understand the cost associated with your investment.

Step 3: Initiate Your Investment

Once you’ve finalised the fund(s) you wish to invest in, access your Angel One account, navigate to the Mutual Funds section, and locate the chosen fund. Since this could be a long-term investment, it’s essential to be cautious during this step. Here’s what to do:

• Decide whether you want to invest a lump sum amount or set up a monthly SIP (Systematic Investment Plan).
• Enter the investment amount and select your preferred payment method. UPI is the recommended mode, but you can also opt for net banking.
• If you’re choosing the SIP route, you can set up a mandate for hassle-free future contributions.

Major advantages of balanced funds 

Risk reduction 

Since stock prices are volatile and unpredictable, Investing solely in equities can be extremely risky. Balance funds offer instant diversification and risk-adjusted returns.  

Tax

If individual investors try to move their funds from equity to debt, they would be subject to taxation. But in the case of balanced funds, the fund manager can switch between debt and equity without presenting the investors with tax liabilities. 

Fund rebalancing

The asset manager will rebalance the fund depending on market sentiment. 

Portfolio diversification 

Balanced funds are excellent choices for investors who want to build a diversified portfolio. Since these funds help maximise returns while offering stability against market-related risks, investors can limit their investment liabilities. 

Protection from inflation  

A portion of a balanced fund is invested in debt assets which can protect against inflation, primarily if the fund invests in foreign bonds. It can help investors beat inflation by investing in countries that are not affected.    

Who should invest in balanced mutual funds?

As we know, investment is always a personal choice since different investors have different investment needs and capacities. Here are three factors that investors should consider before investing.

• The objective of the fund should match its investment objectives.
• The investment time should check with their investment horizon.
• The risk profile of the investors should sync with the fund

Things to consider while investing in Balanced Funds

• Balanced funds give optimum returns when invested for a longer tenor of 5-10 years. Hence, it fits investors with long-term investment goals like retirement planning.
• First-time investors who are sceptical about the high-risk-reward funds can invest in a diversified portfolio with these funds.
• These funds help investors who have a low-risk tolerance. Balanced funds offer higher returns through equity investments while providing a protective net around market risks through bonds.
• Investors with no source of revenue can invest in dividend-paying companies through balanced funds.

Disadvantages of balanced funds 

There are certain disadvantages of balanced mutual funds.

Status asset allocation:

Balanced funds allocate funds in a status ratio of 60/40, which isn’t always the best mix. 

Large-cap focused: Balanced funds create continuous income for investors by investing in large-caps instead of small and mid-cap companies that have generated higher returns. It means that your earnings would be average or lower.

Limited international exposure:

International stocks can add a layer of diversification to your portfolio. Yet balanced funds mostly ignore global markets.    

Wrapping up

We have explained balanced funds meaning so you can research to find the best-balanced funds according to your investment needs. As the name suggests, Balanced funds offer a strategic mix of equity and bonds to earn stable risk-adjusted returns for investors. Despite being conservative, these funds generated higher returns than debt funds, with the equity investment offering capital appreciation and inflation-hedge. 

Disclaimer: “This blog is exclusively for educational purposes and does not provide any advice/tips on Investment or recommend buying and selling any stock”

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