A Balanced Fund is a mutual fund which provides a one stop investment mix by investing its portfolio in a mix of debt and equity instruments with an aim to balance the risk-reward ratio. These funds being ‘balanced’ don’t swing for the fences for performance and ensure to provide a return which over time provides a blended return of shares and bonds.
In India, Balance funds typically invest 50% to 70% of their portfolio in stocks and the remainder of their resources in bonds and other debt instruments. So balanced funds are usually equity oriented hybrid funds. They serve as a suitable option for first time investors who have low risk appetite. They are for investors who do not want to take on risky options but still want capital appreciation.
Advantages of Balanced Funds
Balance funds provide a convenience of diversification in form of a single docket of mutual fund. An investor thus needs go through the hassle of analyzing and selecting a bouquet of funds. A professionally trained and experienced fund manager does this job for the investor. A calculated combination of debt and equity components makes the funds less vulnerable to market volatility. The equity components of the fund are aimed at generating capital appreciation and their debt components serve as securities to shield the investment from unforeseen market corrections.
Disadvantages of Balanced Funds
While it might seem that balanced funds are virtually risk free, it is not entirely the case. Balanced funds have their own share of risk. While in case of a direct investment across a number of stocks and debt instruments, one can relocate the resources among different funds as diversification for tax planning or wealth creation. However, in balance funds since the decision of resource allocation is with the fund manager, customized diversification is not possible.
All the mutual funds with an equity exposure of 65% or more on an average are treated as equity asset class for taxation purpose. So the short term capital gains meaning the gains booked with one year of the equity-oriented balance are taxed at 15%. If these funds are held for a period more than 12 months, their long term capital gains are taxed at 10% if the gains booked exceed Rs. 1 lakh (as per the latest budget of 2018).
Since debt oriented funds are treated as debt funds only, the long-term capital gains tax is applicable if the fund is held for 36 months or more. The Short-term capital gains are taxed at 20% with indexation benefits. Indexation allows investors to be taxed on returns over and above the inflation rate by adjusting the purchase price of the securities for inflation. In other words, equity-oriented balanced funds have a clear tax advantage over debt funds despite having considerably low-risk.
Better risk based returns
Balanced funds have given better risk-adjusted returns in the long run compared to equity returns. A comparison is given below.
|Fund Category||5 year rolling return||Risk based Std. deviation|
|Large Cap Funds||12.90%||3.47|
|Mid cap and Large cap funds||13.96%||3.82|
Ranking of Balanced funds
Based on risk adjusted returns over a 3 year period, expense ratio, CRISIL and Value-research ratings and net assets, equity oriented balanced funds have been ranked as follows.
|Fund||Rating||Category||Expense Ratio (%)||3-Year Return (%)||1-Year Rank||Net Assets (Cr)|
|HDFC Balanced Fund – Direct Plan||* * * * *||HY-EQ||0.8||10.76||1||20080.76|
|ICICI Prudential Balanced Fund – Direct Plan||* * * * *||HY-EQ||0.78||11.16||2||27839.98|
|Tata Retirement Savings Fund – Moderate Plan – Direct Plan||* * * * *||HY-EQ||1.98||11.71||3||532.82|
|Principal Balanced Fund – Direct Plan||* * * * *||HY-EQ||0.66||13.26||4||1018.49|
|L&T India Prudence Fund – Direct Plan||* * * * *||HY-EQ||1.19||9.96||5||9578|
|Aditya Birla Sun Life Balanced ’95 Fund – Direct Plan||* * * *||HY-EQ||0.97||9.35||6||14085.38|
|SBI Magnum Balanced Fund – Direct Plan||* * * *||HY-EQ||1.29||9.19||7||21024.27|
|Franklin India Balanced Fund – Direct Plan||* * * *||HY-EQ||0.97||8.24||8||2210.41|
|DSP BlackRock Balanced Fund – – Direct Plan||* * *||HY-EQ||1.21||10.15||9||7032|
|ICICI Prudential Child Care Plan – Study Plan – Direct Plan||* * * * *||HY-EQ||0.68||9.7||10||131|
(Based on CRISIL and Value-Research reports across multiple indicators)*
*This is a representative list based on key metrics. It does not serve as a recommendation of funds nor does it claim to the only correct way to rank funds. Interest rates mentioned are CAGR.