1. How do Balanced Funds work?
Balanced funds help you to ride the equity wave while still maintaining a low-risk profile. They invest the fund’s assets in equity shares as well as debt instruments in a specific ratio according to investment mandate of the fund. The main objective behind such asset allocation is to enjoy the benefit of diversification. Instead of risking all your money in equity, the balanced fund helps you invest prudently with lower risk.
A balanced fund can be equity-oriented or debt-oriented. An equity-oriented balanced fund invests at least 65% of its assets in equities. The rest of the fund’s corpus is invested primarily in debt, or at times some portion of it is held in cash. On the contrary, a debt-oriented balanced fund invests at least 65% of its assets in debt and money market instruments. The rest of the fund’s corpus is invested primarily in equities.
2. Who should invest in Balanced Funds?
Usually, other mutual funds like equity funds change their asset allocation according to the changing economic conditions. However, balanced funds strictly behave in line with their orientation. These funds don’t go beyond the 65% limit as prescribed in the investment mandate.
Balanced funds are meant for investors who require a fusion of income, safety, and moderate capital appreciation. During the bull runs, the fund is able to generate higher returns due to the equity component. However, during the bear runs, the debt component provides a cushion to prevent erosion of fund returns.
3. Things an investor should consider
Even though they have a certain percentage of fund’s assets allocated to debt instruments, balanced funds are not completely risk-free. The equity component of the balanced fund makes the fund vulnerable to market risks. Market risk causes the fund value to fluctuate as per the movements of the underlying benchmark. Balanced funds are less risky as compared to pure equity funds; but in order to gain the maximum out of your investment, you need to exercise caution and rebalance your portfolio regularly.
If you are a moderately aggressive investor, then you might think of investing in balanced funds. Historically, equity-oriented balanced funds have found to deliver average returns in the range of 10%-12%. In spite of having the debt component in its portfolio, balanced funds do not offer guaranteed returns. The performance of underlying securities affect Net Asset Value (NAV) of these funds and may fluctuate due to market movements. Moreover, these might not declare dividends during market downturns.
Balanced funds charge an annual fee for managing your portfolio which is known as expense ratio. It is shown as a percentage of fund’s average assets. It reflects the operating efficiency of the fund and becomes an important criterion at the time of fund selection. Before investing in a balanced fund, you need to compare its expense ratio with that of competitive funds. Ensure that it has a low expense ratio as compared to peer funds. This will translate into higher take-home returns for the investor.
d. Investment Horizon
Balanced funds may be ideal for a conservative investor who is ready to invest his savings in 5-year bank fixed deposits (FDs). As compared to an FD, balanced funds may deliver higher returns over a medium-term investment horizon of say 5 yrs. Additionally, you would get the benefit of indexation on long-term capital gains on the debt components. If you want to earn a risk-free rate of return, you may go for arbitrage funds which bet on price differentials of securities in different markets.
e. Financial Goals
Balanced funds may be used for intermediate financial goals which can be achieved in a period of 5-7 years. If you have goals like buying a car or funding higher education of one’s own, you may consider balanced funds as a means to finance these goals. Even budding investors who are not opting to manage their portfolio actively but have a low-risk appetite may also invest in balanced funds. Retirees may invest in balanced funds and go for a dividend option to supplement their post-retirement income.
f. Tax on Gains
The capital gains on balanced funds are taxed based on the orientation of the fund. Equity-oriented balanced funds are taxed just like pure equity. If you hold your investment for more than a year, the capital gains are treated as long-term capital gains. Long-term capital gains (LTCG) in excess of Rs 1 lakh on equity component are taxed at the rate of 10% without the benefit of indexation. Short-term capital gains on equity component are taxed at the rate of 15%.
The debt component of balanced funds is taxed like debt funds. STCG from debt component is added to the investor’s income and taxed according to his income tax slab. LTCG from debt component is taxed at the rate of 20% after indexation and 10% without the benefit of indexation.
4. How to invest in Balanced Funds?
You can invest in Balanced Funds in a paperless and hassle-free manner at ClearTax. Using the following steps, you can start your investment journey:
Step 1: Sign up for an account at cleartax.in
Step 2: You need to enter your details like the amount of investment and investment period
Step 3: Get your e-KYC done in less than 5 minutes
Step 4: Invest in your favorite balanced fund from amongst the hand-picked mutual funds
5. Top 5 Balanced Funds in India
While selecting a fund, you need to analyze the fund from different angles. There are various quantitative and qualitative parameters which can be used to arrive at the best-balanced funds as per your requirements. Additionally, you need to keep your financial goals, risk appetite and investment horizon in mind.
The following table represents the top 5 balanced funds in India based on the past 5 year returns. Investors may choose the funds based on a different investment horizon like 10 years returns. You may include other criteria like financial ratios as well.
|Fund Name||1 year||3 year||5 year|
|Tata Retirement Savings Fund - Moderate Plan||14.95||11.68||20.87|
|HDFC Balanced Fund||11.21||10.51||19.42|
|L&T India Prudence Fund||10.71||10.19||19.2|
|Principal Balanced Fund||17.97||13.57||18.35|
|ICICI Prudential Balanced Fund||8.93||10.55||18.31|
*The order of funds doesn’t suggest any recommendations. Investors may choose the funds as per their goals. Returns are subject to change.