The steady returns on balanced funds have made them a popular choice, but if you’re in two minds whether you should invest in balanced funds or dynamic funds, we’ll give you the answer. Read on for the low down on these two types of Mutual Funds.
What Are Balanced Funds?
Balanced funds are hybrid funds that invest in a mix of both equity and debt instruments.
What’s The Mix?
Equity-oriented balanced funds have an exposure of 65% – 75% to equities. The remaining 25% – 35% is invested in debt instruments.
Advice For First-Time Mutual Fund Investors
First-time investors in Mutual Funds should begin their investment portfolio with investments in balanced funds.
Additional Reading: Types of Mutual Funds
Advantages of Investing in Balanced Funds
Balanced funds use the asset allocation model to invest in two categories.
- While the equity component gives you long-term returns, the debt component offers an investor stability in the investment portfolio.
- The diversification of a balanced fund limits the risks from market volatility.
Additional Reading: Intelligent Asset Allocation
Tax Benefits of Equity-Oriented Balanced Funds
- Because balanced funds have a 65% exposure to equities, they are taxed as equity funds.
- Balanced funds give you tax-free returns if they are held for more than 1 year.
- In case the funds are held for less than 1 year, they will be subjected to short-term capital gains tax.
- The dividend option in balanced funds is popular among investors because the dividends are tax-free.
- On the other hand, for investments in debt Mutual Funds, you get the long-term capital gains tax advantage with indexation, only after 3 years.
Additional Reading: All About Risks In Debt Funds
Now we’ll tell you whether to invest in Balanced Funds or Dynamic Funds.
What’s the difference?
Balanced funds strike a balance (pardon the pun) between equity and debt exposure.
Dynamic funds switch between equity and debt. With dynamic funds, you can invest between 0-100% in equities, based on the market situation.
Dynamic funds have shown a lower standard deviation. Standard deviation is the measure of volatility of the returns of a fund.
Dynamic funds usually report a standard deviation of 0.4%.
Balanced Funds have, on the other hand, reported better returns over a long term. They have had a slightly higher standard deviation of 0.7%. That means a slightly higher risk.
Timing the Market
If you invest in dynamic funds, you do not need to constantly monitor the market and your portfolio. When the market rises, there will be an automatic realignment of your portfolio, with more investments in debt and a reduction in equities.
When the markets fall, your investment in equities will increase and debt exposure will decrease.
If you are not too comfortable with timing the market, choose dynamic funds as these funds re-balance your investment allocation automatically.
Additional Reading: What Really Affects The Stock Market
Dynamic or Balanced Funds?
If you are looking to capture market opportunities and if you want a flexible fund structure, dynamic funds are your best bet.
However, if you are risk averse and want funds that manage risks well, balanced funds would be your number one choice.
Investing in Mutual Funds is all about getting the right mix, so be sure to make an informed choice before you take the plunge.