Balanced Funds
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Table Of Contents
What Are Balanced Funds?
Balanced Funds are the funds that invest the money in the mix of both stocks and bonds intending to achieve a high rate of return on the funds along with balancing the risk with the help of diversification. These funds generally have more risk when compared with the fixed income funds but less risk when compared with the pure equity funds.
These funds, like others, are also impacted by the movements in the stock markets as a specific portion is equity-oriented. However, the values of these funds as a whole are to be less volatile in comparison to a 100% equity fund.
Table of contents
- Balanced funds strategically merge stocks and bonds, orchestrating a harmonious interplay of elevated returns and managing risk through diversification.
- Positioned between fixed-income and pure equity funds, they offer an equilibrium where risk is moderated.
- Balanced funds often appeal to investors seeking a middle ground between growth and stability. This blend makes them suitable for individuals with moderate risk tolerance, aiming to capitalize on market upswings while maintaining a degree of protection during market downturns.
- The combination of assets in balanced funds offers the potential for capital appreciation alongside income generation, catering to a diversified range of investment objectives.
Balance Funds Explained
Balanced funds help keep one’s portfolio balanced by letting them invest in diverse instruments, including stocks and bonds at the same time under a single portfolio. It generally acquire 30%-40% of the investment in equity and the remaining in Bonds and (or) other debt investment instruments.
Though these instruments are of great use to those who want to reduce the risk associated with their investments, they are not suitable for all. So, let us take a look at who should and who should not consider balanced or hybrid funds as an investment option.
These are an ideal options of investment primarily for investors who are either
- looking for a stable and steady return with a mid-term investment holding/return gain period (say five years)
- new entrants to the investor’s group with no or limited investment knowledge
- looking for diversification in investment avenues
- Requires to withdraw while maintaining investment.
These would not be an ideal option of investment primarily for investors who are either.
- Willing to take or can manage higher risk
- Looking for a high return on their investments
- Looking to invest in a specific choice of fund since the selection of funds remains with the fund manager.
Types
Balanced funds exist in two forms – Equity-oriented funds and debt-oriented funds.
An equity-oriented balanced fund, as the name suggests, is an investment where 65% of the finance is used in equity or equity-related instruments. The rest is used for debt securities.
On the other hand, the debt-oriented fund is the complete opposite. In this case, 65% of the investment portion is utilized for debt securities, while the remaining is kept aside for equity, cash and cash equivalent instruments. The investment, under this scheme, include investing in treasury bills, bonds, debentures, etc.
No matter which type of balanced fund one opts for, the objective is same for both, i.e., to have a balanced portfolio so that even if one investment fails, the other helps them reap profits and bear with the losses. In short, these funds keep the investors the same against volatile market scenarios.
Examples
Let us consider the following examples to understand the balanced funds meaning better:
Example 1
Mr.Raj wishes to invest a sum of Rs.1,00,000
Suppose Raj is a less risk taker and isn’t willing to take a high risk with his investment choice. He might hold a diversified investment portfolio as per the below table.
| Investment Avenues | Investment % | Average Return % | Investment Value | Average Return |
|---|---|---|---|---|
| Government Bonds | 55% | 2.50% | 55,000 | 1,375 |
| Corporate Bonds | 30% | 4.00% | 30,000 | 1,200 |
| Equity | 15% | 18% | 15,000 | 2,700 |
| Total | 100% | 8.17% | 1,00,000 | 5,275 |
Debt Oriented Fund
Suppose Raj is a risk-taker and is willing to take a high risk with his investment choice. He might hold a diversified investment portfolio as per the below table.
| Investment Avenues | Investment % | Average Return % | Investment Value | Average Return |
|---|---|---|---|---|
| Tech Stocks | 25% | 18% | 25,000 | 4,500 |
| Pharma Stocks | 25% | 16% | 25,000 | 4,000 |
| Telecom Stocks | 25% | 17.50% | 25,000 | 4,375 |
| Government Bonds | 15% | 2.50% | 15,000 | 375 |
| Corporate Bonds | 10% | 4.00% | 10,000 | 400 |
| Total | 100% | 13.50% | 1,00,000 | 13,250 |
Equity Oriented Fund
An investor must always be thoughtful and remember that their investment in balanced funds is not always protected from market movements and still bears a risk.
Example 2
Recently, one of the US news sources listed the best balanced funds to invest in, which included Vanguard LifeStrategy Moderate Growth Fund, Fidelity Freedom Index 2030 Fund Investor Class, etc. According to the report, investing in these funds reduces risk as the 60/40 (stocks/bonds) investment distribution in a single portfolio helps diversify options, thereby ensuring investors profit and get protection against a loss.
Taxation
From the tax point of view, taxation policies are different for equity and debt funds. If an investor holds a balanced fund for fewer than 12 months, it shall be categorized under Short-term, and if it exceeds to have for over 12 months, it shall be classified under Long-term.
| Investment Avenues | < 1 Year | 1 to 3 Years | > 3 Years |
|---|---|---|---|
| Equity / Hybrid / Balanced | 15% | 10% (If gain is more than 1,00,000) | 10% (If gain is more than 1,00,000) |
| Debt | As per income slab | As per income slab | 20% (as pe indexation) |
As per the recent updates, the investment made in debt funds held for more than three years in India will be categorized under the long-term and shall be levied capital gains tax percent cent with indexation benefit. Any earnings made from short term investment on debt investments would be added to the income and taxed as per the income tax slab under which the investor shall come.
The longer you hold to your balanced fund, the better the taxation benefit.
Advantages & Disadvantages
Balanced funds may or may not be suitable for an investor to proceed with, given their requirements and objectives. Whether these options are good to go or not, one must be aware of the positive and negative aspects of this financial alternative.
Let us have a look at the benefits and risks of these financial instruments in brief:
| Pros | Cons |
| Allows diversification | High fee involved |
| Managed by experts | Lower returns compared to equity funds |
| Helps maintain a balance between growth and preservation of wealth | Not risk free |
| Reduced or balanced risk |
Balanced Funds Vs Equity Funds
Balanced and equity funds are the two most widely used financial instruments, in which investors invest in. While the former provides a person to enjoy diverse investments through a single portfolio, the latter is only concerned with equity investments.
Besides this, there are many other aspects they differ in. Let us have a look at some of those aspects in a tabular format below:
| Category | Balanced Funds | Equity Funds |
| Level of Risk | Involves a higher degree of risk as market fluctuations affect them widely. | Involves higher degree of risk as market fluctuations affect them widely. |
| Returns | Lower than equity funds | Higher than balanced or hybrid funds |
| Liquidity | Less liquid | Highly liquid |
| Nature | Allows diversification | Allows equity investments only |
Frequently Asked Questions (FAQs)
Balanced funds offer a crucial balance between growth and stability. They invest in both stocks and bonds, helping investors diversify while aiming for moderate returns. This balance can be especially important for those seeking a steady income and some capital appreciation without the high volatility of equity-only funds.
Balanced funds are allocated to both stocks and bonds, seeking a mix of growth and income. Equity funds predominantly invest in stocks, aiming for higher growth potential but with more risk. Balanced funds provide a middle ground by potentially reducing risk while still pursuing some capital appreciation.
The risk of balanced funds lies in their exposure to both equities and bonds. While they aim to mitigate risk, market fluctuations can still impact performance. A sudden market downturn could lead to potential losses in both asset classes, affecting the fund's value.
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