Balanced funds are the unsung heroes of stock markets. They are also known as Hybrid funds as they have a fixed mix of stocks and bonds. Balanced funds have a high or a moderate equity component. It is a fund type generally for people who are looking for low-risk, income and decent capital appreciation. If you are an investor looking for avoiding unnecessary risks, then Balanced funds are the best option.
A balanced fund gives your capital the exposure of both equity and debt instruments. When combined, Balanced funds have both low risks and high returns.
Let us take an example
Let us assume you have Rs. 1,00,000 in your portfolio. The allocation is set at 75% stocks and 25% bonds. Hence, the allocation would be 75,000 is in stocks and 25,000 is in bonds. When invested, the stocks appreciated to 80000. The fund manager sells few stocks of Rs. 1250 and places them in bonds. Hence, Rs 78,750 (Rs 1,05,000 x 0.75 = 78,750) is in stocks and remaining in bonds.
The ratio is back on 75% stocks and 25% bonds which are Rs. 78,750 in stocks and Rs 6250 in bonds. The method is carried out on a regular basis. When the asset class goes up, the funds are sold and others are bought. Hence, this structured investment brings in flexibility who want to invest for a long term.
As equities form a major part of the Balanced funds, it provides a good shield to battle which will erode your purchasing power in the later years.
As per IT Law an individual is required to pay tax on debt instruments. But, balanced funds provide a unique proportion where 35% is invested in debt, but there will be no tax on the returns earned on such products.
Asset Allocation and volatility
The equity market goes through many swings as things are never certain in the stock exchange. But, an investor always invests in the funds that are giving most profit. But, when equities form a major part of your portfolio,Balanced funds rebalance them by selling few and adding debt products. This provides capital protection if equities fall in future.
The balanced funds protect the investor’s money if one does not wish to have a separate debt and equity account. One can choose the style of investment when choosing a portfolio.
You should invest in monthly investment procedure for profitable returns rather then look for capital appreciation if the risk profile is low. The capital protection fund of the Balanced funds is a close ended one. They aim at consistent returns and secure the money during unpredictable market conditions. The capital protection fund is suitable for people who do not want to risk their principal amount. They still enjoy the lock-in period and the benefits.
For example, in 2003, the funds invested in government securities gave double digits like equity markets until 2004. After 2008, the stock market picked up after the early signs of recovery and debt did well. This happened after RBI cut the interest rates to revive the economy.
Balanced funds do well when the market is going through a difficult time as they have a debt cushion. Hence, they can withstand the shocks by the stock market. But, when the stock markets are rising, they might not do well as funds with 100% equity component.
The idea of investing in Balanced funds is they give regular pay outs. Hence, one must choose funds with consistent dividend record. Balanced funds can also be customized as per tax needs. All the types of investment have tax implications, but one can choose a fund that combines your investment goals with your tax needs.