A balanced fund is a type of hybrid fund that is apt for individuals aiming to diversify their portfolios. This new form of the hybrid fund was introduced in 2017 after SEBI re-categorised mutual fund schemes.

On that note, allow us to elaborate on the ins and outs of balanced funds.

A balanced fund is a type of mutual fund whose portfolio includes debt and equity components in a specified ratio. As a result, balanced mutual funds facilitate income as well as capital appreciation, alongside lowering the potential risk of investment. Moreover, this helps investors with maximum returns from both segments.

In brief, a balanced fund is a comprehensive investment option providing exposure to equity and debt securities. The primary purpose of this fund is to maintain the risk-reward ratio stability.

[Source]

Balanced funds have the option to invest 40-60% of their corpus in debt and 40-60% in equity. For instance, a fund manager, bearish on stocks, can invest 40% or 50% of the corpus in stocks and the remaining in debt. Likewise, if a fund manager is bullish on equity, he/she can invest 60% in stocks and the remaining 40% in debt.

So, based on their outlook, fund managers have the freedom to shift between debt and equity, which allows them to realign the portfolio.

Moreover, a mixed portfolio of debt and equity makes balanced mutual fund schemes comparatively safer than pure equity funds. In addition, the debt portion of their portfolios ensures stability, while the equity part helps investors earn extra returns.

[Source]

Balanced funds have a number of features and benefits that can be attractive to potential investors, such as the following:

1. Rebalancing of Funds

There may be instances wherein the equity market is overvalued compared to the debt market and vice versa. In such circumstances, a fund manager can navigate the two asset classes – debt and equity. As a result, he/she effectively balances the fund’s performance and tackles market fluctuations.

2. Lowers Risk

Equity markets are highly volatile. Therefore, investments in pure equity funds involve significant risk. In this regard, the debt component of a balanced fund allows one to balance out the associated risk of investment posed by its equity component.

3. Diversifies Investment Portfolio

Balanced mutual fund investment is an ideal vehicle to attain portfolio diversification. Moreover, this diversification ensures the dual benefit of risk reduction as well as capital appreciation.

4. Protection from Inflation

Given their unique allocation of assets, equity component of balanced funds offer higher returns while their debt portion extends regular income. As a result, these mutual funds serve as a hedge against inflation.

5. Tax Implications

Capital gains on balanced funds are taxed depending on the equity-debt orientation of a fund in this manner:

• Equity-Based Balanced Funds: These funds are taxed like pure equity funds. So, long-term capital gains (LTCG) earned on the sale of mutual fund units after a holding period of 1 year are tax-free up to ₹1 lakh. LTCG exceeding ₹1 lakh is taxed at 10%, excluding the indexation benefit. On the other hand, short-term capital gains, which are earned on the redemption of units before a holding period of 1 year, are taxed at a rate of 15%.

• Debt-Based Balanced Funds: These mutual funds are taxed like debt funds. Therefore, in the case of investments held for less than 3 years, STCG are taxed according to one’s applicable tax slab. LTCG earned on redeeming units after 3 years are taxed at 20%, along with indexation benefits.

[Source 1]

[Source 2]

These funds are meant for investors who are looking to earn an income along with a medium capital appreciation. If you have a low risk appetite and want exposure to both equity and debt funds, a balanced mutual fund can be considered to invest in.

Follow the below steps to start your investment journey:

1. Create an online account with an asset management company (AMC).
2. Fill up the KYC details and furnish all the required information.
3. Select the type of fund you want to invest as per your financial requirements.
4. Complete the payment to begin your investment in balanced funds. You can either go for a lumpsum payment or make an investment via SIP.

1. Expense Ratio

Like any other mutual fund, hybrid or balanced funds levy expense ratio. Expressed in percentage, expense ratio is the fee charged by an asset management company for its services. Naturally, a high expense ratio increases the cost of investment.

2. Past Performance

It is imperative for prospective investors to evaluate the past performance of a balanced fund before investing in it. That said, one must note here that although it is an important factor, past performance is not an indicator of future returns. Therefore, it is wise to take a fund’s past performance into account in order to have a rough idea of its probable returns.

3. Risk

Balanced funds are considered to be less risky than other mutual funds, like equity funds. However, as investors may already know, all mutual fund investments involve some risk. Therefore, it is critical for investors to gauge their tolerance for risk before investing.

4. Experience of the Fund Manager

It takes years for one to learn the effective navigation of funds through market fluctuations. So, a fund manager with several years of experience in the industry will have the necessary knowledge and know-how to tackle market volatility and maximise returns.

Balanced funds serve the dual purpose of risk reduction and wealth creation, which make them a preferred investment vehicle for investors. However, prior to investing in a balanced fund, it is best to ascertain your financial goals, investment horizon, and risk appetite.