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Balanced Mutual Funds – Why You should Invest in Balanced Mutual Funds

Why you should invest in balanced mutual fund?

One of the ways to grow your savings is to invest in the stock market. Historically, investments made in the stock market have given a higher rate of return as compared to investments in fixed income products over the medium to long term.

But investing in equity is highly risky since the performance of the equity shares oftentimes depends on market conditions as well as performance of the company. Choosing a company to invest in takes a fair bit of research which may not be possible for everyone. The next best alternative is to invest in an equity mutual fund, which too is highly risky for people who don’t have a higher risk appetite.

The correct alternative for such investors would be to invest in balanced mutual funds.

What are balanced mutual funds?

A balanced mutual fund or a hybrid mutual fund invests its corpus in a mix of equity and debt. There are two types of balanced mutual funds:

• Aggressive hybrid fund (More than 60% in equity and balance in debt instruments)
• Conservative hybrid fund (More than 60% in debt instruments and balance in equity)

A balanced mutual fund gives the investor the high growth that equity does and also the stability of a debt instrument. For investors looking to begin investing in equity, choosing a balanced mutual fund is a good way to start.

What does a balanced mutual fund invest in?

Balanced mutual funds divide their corpus between equity and debt instruments. When it comes to equity, the investments depend on whether the fund is aggressive or conservative. Aggressive funds may also invest in mid cap stocks and small cap stocks. Conservative funds invest a majority of their resources in large cap stocks which may not grow as fast, but are a stable form of growth.

When it comes to debt instruments, the best balanced mutual funds invest in a range of instruments such as:

• Government of India bonds
• State Government bonds
• Certificate of Deposits
• Non Convertible Debentures
• Treasury Bills
• Commercial Paper
• Company issued debentures and bonds

It is possible to find out the portfolio on the mutual fund house’s website or on other finance websites. The debt portfolio is split up based on instruments and the risk level of the securities. Generally, hybrid mutual funds tend to invest in low risk securities.

Before you pick one of these funds to invest in, it is better to analyze balanced mutual fund advantages and disadvantages so that you know whether this type of investment is the right one for you.

Here are some reasons why to invest in balanced mutual funds:

1. Diversification of risk:
Balanced mutual funds provide an excellent way to diversify portfolio risk. By investing in equities, they provide higher returns, however, since some portion of funds get invested in debt, they also stabilize the overall risk of the portfolio. For investors who are conservative, investing in a balanced mutual fund can provide a slightly riskier outlet with a higher rate of capital growth. On the other hand, for aggressive investors, diverting some portion to a balanced mutual fund can reduce the overall portfolio risk.

2. Higher returns:
When it comes to balanced mutual funds India offers many alternatives to all types of investors. Conservative investors can put their funds in conservative hybrid funds that put a majority of their resources in low risk debt instruments and the balance in equity. This provides higher returns as compared to investing in pure fixed income instruments. For aggressive investors, these funds provide a fixed return which is useful in case of market downturns.

3. Tax advantages:
Investing in an aggressive hybrid fund (more than 60% in equities) will give tax benefits since this gets classified as an equity fund. The gains on this will be taxed like an equity mutual fund with a holding period of 1 year for the gains to become long term. This provides significant advantages to the investor. On the other hand, conservative hybrid funds are classified as debt funds with a holding period of 36 months for gains to be long term.

4. Dividend:
There are monthly dividend paying balanced mutual funds which provide dividend to their investors. Putting resources in these funds provides a regular return in the form of dividends as well as capital growth through equity investments.

5. Automatic portfolio rebalancing
Occasionally, the balance between the equity markets and the stock markets is tipped to one side. Either of the market can be overvalued. In such situations, you may want to invest more in one of the two markets. However, in other funds, this may not be possible as the funds may be restricted due to the SEBI rules. However, when it comes to balance funds, the fund manager has the leeway to move between the two asset classes.

Now that you have understood what are balanced mutual funds, where they invest and why to invest in balanced mutual funds, are you looking at making investments in balanced mutual funds? Here are some IndiaNivesh recommended balanced mutual funds which have given good returns to the investors.

Balanced Mutual Fund Schemes May 2019


Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.