An Introduction To Balanced Funds

By BankBazaar | August 22, 2016

Best Balanced Funds To Invest In This Year

Balanced Funds have a mix of equity and debt investments, and hence, are a stable option for those investors who are not comfortable with taking a high degree of risk with investments.

Why should you invest in Balanced Mutual Funds?

Many investors are constantly on the lookout for avenues to multiply their investments, preferring stable and assured returns.

  • Balanced Funds are your best bet

That’s because these funds give investors a mixed portfolio with investments in both stocks and bonds.

With Balanced Funds, the allocation of your investment portfolio gets automatically rebalanced depending on market conditions.

  • Balanced Funds are flexible

Investments in Balanced Funds are allocated on a 65:35 basis, where there is a 65% investment in equities and 35% in bonds. The equity portion might go up but may not fall below the 65% levels. The debt portion is usually held at 35% or less. This is because fund houses want to retain the tax benefits that an equity Mutual Fund will provide.

Tax benefits of Balanced Funds

Balanced Funds that have maximum exposure to equities attract short-term capital gains tax at the rate of 15%. The long-term capital gains from these Balanced Funds attract no tax. Note that according to rules laid out way back in 2006, a Fund that invests more than 65% of its assets in the equity market is considered to be an Equity Fund. Therefore, the taxation of such funds (including balanced funds) will be the same as that of pure Equity Funds whereas a Debt Fund will attract a tax of 20% with indexation if you incur long-term capital gains on these funds. This is why fund managers prefer to keep the equity portion of a Balanced Fund at over 65%.

BB Tip: You can save on capital gains tax by investing in Balanced Funds.

Who decides the percentage allocation?

The allocation of funds varies according to each fund house or fund manager. Based on the highs and lows of the equity and debt markets, the fund manager rebalances the allocation to maintain a good mix of assets that will generate the best returns. For instance, during a bull run (when markets are rising), the equity portion of the fund can be stepped up to take advantage of the opportunities in the equity market. Similarly, when equity markets are not doing so well, the fund manager will increase the debt portion of the fund to ensure that the capital of the fund is protected from the downtrend in the equity market. That is why balanced funds might outperform pure equity funds in the short-term, especially when the equity markets are highly volatile. This is precisely the reason why balanced funds are perfect for first-time investors.

Additional Reading: Understanding Mutual Funds

There you go. Now you have all the information you need about investing in Balanced Funds right at your fingertips. Go ahead, make the right decision and invest smartly.

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