Also known as hybrid funds, balanced funds have gained immense popularity among investors due to their portfolio diversification. If you are new to investing, opting for this kind of fund can be the preparatory stage of your mutual fund investment journey. This blog will cover everything you need to know about balanced or hybrid mutual funds before you consider investing in them.
What Are Balanced Funds?
Balanced hybrid mutual funds invest in both equity and debt mutual funds. It helps investors to diversify their portfolios by investing in asset classes like debt and equity. The primary objective of this mutual fund is to balance risk-reward ratio and maximise investment returns. These mutual funds are designed to automatically re-balance the portfolio of investors' during any market fluctuations.
The re-balance process also allows professional fund managers to sell equity mutual funds in order to retain the fund's performance and vice versa. Therefore, investors seeking capital appreciation at the lowest possible risk can opt for balanced funds.
Usually, equity funds follow the rules of variable asset allocation based on market conditions. However, the advantage of this kind of mutual fund is that they never go beyond the limit of 65% mandated by the investment guidelines. As a result of which, during a bull market, the best balanced mutual funds generate higher returns from their equity portion. Again, during the bear market, the fund's debt component prevents the drop of returns.
What are the Tax Implications of the Top Performing Balanced Funds?
The tax implication of balanced funds are as follows:
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For Debt-oriented Funds
Balanced hybrid funds that are more debt-oriented are taxed under the rule for debt assets. The short term capital gains are taxed at a rate of 20% with indexation benefits. Also, taxation on long-term capital gains is considered if they keep these funds for more than 36 months.
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For Equity-oriented Funds
For tax purposes, mutual funds that have an equity-based investment ratio of more than 65% fall under the class of equity assets. These funds are subject to 15% tax on the short-term capital gains. This short-term capital gain includes all profits booked with a year.
If you hold onto the funds for more than a year or 12 months, then they are subject to a 10% on the long-term capital gains. However, this tax is applicable only if the gains are more than ₹1 lakh in total.
What Are the Advantages of Balanced Funds?
Balanced hybrid funds eliminate the need to time market fluctuations as they can easily adapt to ever-changing market scenarios. Here are some of the notable benefits of balanced mutual funds:
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Investment Portfolio Diversification
When it comes to diversifying your investment portfolio, these funds are an excellent option. As these funds help to maximise returns while also providing a safety net against market-related risks, now you have the perfect option to limit your investment liabilities.
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Taxation Benefits
Capital gains taxes would apply to investors if they move between the funds themselves. If investors choose to exit debt funds within 36 months of investing them, this could lead to a high tax rate of about 30%.
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Relatively Lower Risk
It can be extremely risky to only invest in equity funds. For instance, during the 2008 financial crisis, equity fund investors suffered significant losses as there was a massive decline in the NIFTY index from 6000 levels to 2500 levels. Debt instruments in balanced or hybrid funds aid in balancing the risk posed by equity funds.
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Requires Less Monitoring
Through balanced funds, you can choose to invest in a good mix of bonds, stocks and other instruments. Tracking and monitoring the performance of multiple types of equity securities and bonds can be a cumbersome and time-consuming process. However, in this case you need to monitor only one mutual fund if it meets your investment objective and risk tolerance.
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Protection from Inflation
Balanced hybrid mutual funds act as an inflation hedge because they contain debt assets in part. Especially, if you invest in international bonds, they can help to protect you from inflation by giving access to countries that have not been affected by it. Therefore diversification in one’s portfolio serves as a buffer against the ongoing rise in market prices.
In addition, they permit you to periodically withdraw funds without any alteration to asset allocation. Thus, low-cost schemes can maximise your investment returns while safeguarding you from a variety of market risks.
What Are the Disadvantages of Balanced Funds?
Here is the list of the disadvantages of balanced mutual funds:
- The status ratio of 60:40 in balance fund allocation is not always optimal. Balanced funds generate ongoing income for investors by investing in large-caps rather than mid and small-cap companies. It indicates that your earnings would be lower than average.
- Balanced funds incur all of the risks associated with debt and equity investment as they invest in both types of securities. The risk that is related to equity instruments in this hybrid portfolio includes concentration risk, market risk, and volatility risk. On the other hand, a hybrid portfolio of debt instruments carries different risks including, interest rate risk, and credit risk.
Despite such disadvantages, balanced funds can help you to achieve your financial goals at a relatively lower risk. However, to invest in this fund, you should understand these funds have some exposure to equities. To assess all risks related to equity and equity-linked instrument, it is imperative to check for the equity exposure of these funds you are considering to investing in.
Wrapping Up
When it comes to balancing risk and reward choosing a balanced fund can help you to get the best. This blog explains everything about balanced funds so that you can find the best-balanced funds depending on your investment needs.
This type of mutual fund provides investors with stable risk-adjusted returns by strategically combining bonds and equity. Despite being conservative, these funds generate higher returns with the equity investment offering inflation hedge and capital appreciation.