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6.2

What Are Balanced Funds, Its Types & Advantages

The intent to get aggressive returns is what drives you to invest in equity and equity-oriented mutual funds. On the other hand, if you believe in taking lower risks then it is very likely that you will opt for debt-oriented investment options to have predictable returns and fixed income.

But if you want to draw the maximum out of your investment and yet not take high risk, then going for a Balanced Fund makes perfect sense.

Balancing your investment

A Balanced Fund (or a Hybrid Fund as it is known sometimes), gives your capital an exposure to both equity and debt instruments in good measure. By combining these two classes of investment, a Balanced Fund combines the best facets- low risk and higher returns. A Balanced Fund can be primarily of two types based on asset allocation –

Equity Balanced Fund

In this type of fund, the majority of the capital (generally 70-75%) is invested in equity instruments with the rest for debt instruments. The higher risk that the equity investment holds is balanced out by the percentage invested in debt instruments.

Debt Balanced Fund

Here, the motive is safer investment while still taking advantage of returns from the stock market. The equity-debt ratio here is practically the opposite of an equity-oriented Balanced Fund.

Advantages of a Balanced Fund

  • A Balanced Fund offers the best of both worlds – the potential of higher returns from the equity component and stability of the debt component. This makes Balanced Funds less volatile.
  • The returns that you get from Balanced Funds are risk-adjusted. This factor is governed by how Fund Manager allocates the assets. By selecting small cap and mid cap stocks, the gains that the equity component can give are much higher and the associated risk is well taken care of by the debt investment.
  • If your Balanced Fund is equity focussed and for the long term, then the major part of your investment is exempt from long term capital gains tax and the debt component comes with indexation benefit for holding periods beyond a year. That makes Balanced Funds a good tax saving investment as well.

From a broader outlook, Balanced Funds tick all the boxes for a Conservative investor who wants to benefit from the stock market as well as fixed income options and it represents a very sensible long-term investment option that can give steady yet promising capital appreciation and provide respectable returns for the later phase in life.

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