Financial experts have always advised owning a diversified portfolio with investment across various asset classes and securities. Diversification can help you to mitigate the risk associated with different investments.
Isn’t it wonderful if there was a way for investors to participate in both equities and debt securities through a single fund? There is, in fact, such a thing as balanced mutual funds.
What is a Balanced Mutual Fund?
A Balanced Mutual Fund, also known as a hybrid fund, is a class of mutual funds that contain a debt component and an equity component in a specific ratio in a single portfolio. These funds help investors diversify their portfolios by investing in assets such as equity and debt. Usually, hybrid funds stick to a relatively fixed mix of bonds and stocks.
Balanced Mutual Funds are one-stop investment options that offer exposure to equity and debt securities. The main aim of these mutual funds is to balance the risk-reward ratio and optimize the return on the mutual fund investment. And thus, Balanced Mutual Funds are suitable for investors looking for capital appreciation at minimum risk.
What are the Types of Balanced Mutual Funds
Balanced Mutual Funds are broadly classified into two types:
Equity Oriented Balanced Mutual Funds
This mutual fund invests at least 60-65% of its corpus in equity and equity-related securities. The remaining corpus is invested in debt or money market instruments to provide stability during unstable market conditions.
Debt Oriented Balanced Mutual Funds
Debt-oriented Balanced Mutual Funds invest at least 65% of their corpus in debt securities. The debt component of the scheme includes investment in fixed income instruments such as debentures, bonds, government securities, etc.
Reason You Should Invest in Balanced Mutual Funds
There are several benefits of investing in Balanced Mutual Funds. Let’s understand it in depth.
Investing in equity attracts risks as the equity market can slump in the worst-case scenario. Thus, the debt component in Balanced Mutual Funds helps the investors balance out the equity component’s risk.
Balanced Mutual Funds offer diversification in the form of single mutual funds. It allows the fund managers to maintain a diversified portfolio with investments across various asset classes. Diversification serves the dual purpose of capital appreciation and risk reduction.
Rebalancing of Funds
When equity markets are overvalued in comparison to the debt market and vice versa, the fund manager has the liberty to move across the two major asset classes, i.e., equity and debt, and balance the fund’s performance against market fluctuations.
Protection from Inflation
The debt component offers a regular income owing to its unique asset allocation. In contrast, the equity component provides better returns; Balanced Mutual Funds act against inflation.
How are Balanced Mutual Funds Taxed?
The taxation of both equity and debt Balanced Mutual Funds differs from each other; let’s have a look at it:
Tax on Equity Oriented Hybrid Funds
Balanced Mutual Funds with higher exposure to equity instruments are treated as equity funds for taxation purposes. Such as, short-term capital gains are treated at 15%. They are taxed at 10% for gains above Rs 1 Lac for long-term capital gains.
Tax on Debt Oriented Hybrid Funds
Balanced Mutual Funds with a larger exposure to debt securities are considered debt funds for tax purposes. Tax exemptions are not available for capital gains from debt funds. For investment held for less than three years, the short-term capital gains are taxed per the individual’s income tax slab. It is taxed as 20% for the long-term capital with indexation benefits.
Who Can Invest in Balanced Mutual Funds?
Balanced Mutual Funds are an ideal investment option for stable income from medium capital. Those with a low-risk tolerance, such as retirees, can invest in Balanced Mutual Funds to balance out the risk and returns.
Equity mutual funds follow variable asset allocation according to the market conditions. Balanced Mutual Funds have the edge over equity funds as they adhere to their asset allocation rules and never exceed the exposure norms. And hence Balanced Mutual Funds generate higher returns from their equity component during the cogent market.
How to Invest in Balanced Mutual Funds?
You can easily buy Balanced Mutual Funds from anywhere and anytime and track the performance from SIP Calculator App. Axis Balanced Mutual Funds provide a balance between equity and debt allocation. You can invest in mutual funds through the Axis Mutual Fund app and calculate your returns through SIP Calculator App.
Investing in Axis Balanced Mutual Funds may provide you with several advantages, including the possibility for wealth building, diversification, and long-term goal planning, among others. Based on your investment objectives, you may also pick the amount of investing money, either a lump sum or SIP mode, and keep track of it using the SIP Calculator App.
To conclude, Balanced Mutual Funds are a better option if you’re looking for a stable investment option. You get the benefit of both equity and debt as described above. Balanced Mutual Funds come with the ability to deliver inflation-beating returns while keeping the risk in check.
To mitigate market risk, you can use a Systematic Investment Plan (SIP) to invest in balanced funds, which will provide your portfolio with the benefits of compounding and rupee-cost averaging.