What are Balanced Funds?
Mutual funds are formally categorized by the asset class of investments they own. Some mutual funds only own stocks. Some mutual funds only own bonds. The former are called as equity funds and the latter are bond funds or fixed income funds. Some mutual funds own both stocks and bonds. Hence, these are called balanced funds.
As the name suggests, these funds keep the balance between the two asset classes (both stocks and bonds) in a single fund. Due to the unpredictable stock markets, the word ‘balance’ is used to denote that equities impose an undoubted risk to investments. Hence to balance this risk, a certain percentage of debt investments are made. They are also called as hybrid/blended funds since they own both stocks and bonds. Since balanced funds are a mix of Equity and Debt, they have lower liability to change than the Equity Funds and their Returns are higher than the Debt funds. Though in a bull market these funds will not give as much return as pure equity funds but the loss would be lower than those funds in a downward moving market.
Thus, the balanced fund is the combination of several stocks and bonds, which is designed to balance the aim of achieving higher returns against the risk of losing money. The investment in stocks offers the growth opportunities, while the investment in fixed income securities (bonds) stabilizes the portfolio during the fluctuations in the equity markets. These types of funds are designed for those investors who want to minimize the risks in such investments. Balanced funds on an average keep about 70 per cent of their portfolio in equities and the remaining 30 per cent in debt. This debt is usually in the form of medium to long-term AAA-rated bonds of public sector institutions, private companies, and banks. . By keeping equity and debt investments in the same portfolio, a balanced fund cuts down its risk. The existence of adjusted returns for both equity and debt investments is the key reason for the existence of hybrid funds especially balanced funds. The balanced strategy of the mutual funds ensures that the investor gets the best outcome no matter what occurs in the equities or bond market.
Why should one invest in Balanced Funds?
These funds form an alternative for intermediate-term investors who are looking for a mix of safety, income and satisfactory returns on their investment. In short words, an investor by investing in both – equities and debts, are likely to generate high returns with moderate risk. Also, balanced funds do not have to change frequently their mix of stocks and bonds; they tend to have lower total expenses.
Balanced funds are suitable for persons who are willing to invest a smaller portion of their income monthly. The main advantage of a balanced fund is its convenience. Instead of buying a collection of funds, one can theoretically achieve diversification by investing in just one balanced fund. Generally, a first-time mutual fund investor is suggested to start with investment in balanced funds. Since balanced funds carry lower risk as compared to pure equity-oriented funds, Investors are increasingly putting money into balanced or hybrid funds. Also, a balanced fund allows the investor to make systematic withdrawals while maintaining suitable asset allocation.
Balanced Funds give better adjusted returns than other funds. Risk adjusted return is defined as the return you get for a given amount of risk. The financial measure of risk adjusted returns is a bit more tangled and is known as Sharpe Ratio. Sharpe ratio is defined as the ratio of excess return (i.e. difference of return of the fund and risk free return from Government securities) and annualized standard deviation of returns (a measure of volatility risk of a fund). Higher the Sharpe ratio better is the risk adjusted performance of the fund.
What are the various types of Balanced Funds in India?
Balanced funds have been around in India for more than 20 years. The main classification of balanced funds is of two types. They are: Equity Oriented Balanced Funds and another is Debt Oriented Balanced Funds.
- Equity-Oriented Balanced Funds:
These funds primarily have minimum 65% equity and the remaining 35% will be in debt investment. Here, the investors are willing to take the moderate type of risk.
- Debt Oriented Balanced Funds:
At least 65% of the funds are invested in the debt instruments while the remaining portion is invested in the equities. These funds are chosen by those investors who are likely to take less amount of risk.
Are Balanced Funds are tax free?
Equity Oriented Balanced funds and debt oriented balanced funds are subjective to long term capital gains tax (LTCG) and short term capital gains tax (STCG).
- Capital gains tax:
Capital gains tax is a tax that is charged on the profits that he/she has made by selling his/her capital asset. In other words, it is a tax imposed on profits earned. For making it easy for taxation, the capital assets are classified to ‘Short-Term Capital Asset; and ‘Long-Term Capital Asset’.
- Short-Term Capital Asset:
If the shares and securities are held by the taxpayer for a period not more than 36 months preceding the date of its transfer will be treated as a short-term capital asset.
- Long- Term Capital Assets:
If the taxpayer holds the shares and securities for a period exceeding 36 months before the transfer will be treated as a long-term capital asset.
- Short-Term Capital Gains Tax (STCG):
If a capital asset (stocks, bonds, land, residential property etc.) is sold within 36 months from the date of acquisition, profits from the sale are termed as short term capital gain.
Short Term Capital Gain = Sale Consideration – (Cost of Acquisition + Cost of Improvement + Cost of Transfer).
- Long-Term Capital Gains Tax (LTCG):
If the capital asset (stocks, bonds, land, residential property etc.) is sold after 36 months from the date of acquisition, profits from the sale are termed as long term capital gain.
Long Term Capital Gain = Sale Consideration – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Transfer + Exemptions).
Equity oriented balanced funds, if held for more than 12 months are exempt from long term capital gains tax. For periods less than that, short term capital gains tax is applicable at 15 percent.
For debt oriented balanced funds, long-term capital gains tax is applicable if the fund is held for 36 months or more. This is at 20 percent with indexation benefits.
Mutual Fund Taxation FY 2018-2019
Choosing a balanced fund that suits the investor’s long-term goals is very important. The history of the funds is not the only factor to be considered. Experts are of the view that when choosing a balanced fund that contains both the asset classes, the deciding factors of both asset classes have to be taken in to consideration. When evaluating the equity portfolio, the investor should look for factors like the fund house, fund manager, asset value, constancy of portfolio, diversification, risk taken by the fund, asset size, and the historical returns. When evaluating the debt portfolio, the investor should pay attention to the asset quality, fund manager’s qualification and sensitivity of the fund to rate changes.
Why balanced funds were able to give higher risk adjusted returns? Because balanced funds keep rebalancing their asset allocation to maintain their asset allocation (equity and debt) ratios within a certain range. They shift from equity to debt when equity valuations are high and from debt to equity when equity valuations are low. In other words, an investor by investing in both – equities and debts, are likely to generate high returns with moderate risk. They are equally good investment options for the experienced investors who can use these funds for managing their asset allocation between equity and debt. The equity taxation of balanced funds also makes it reliable for investors. Investors better consult with financial advisors, if balanced funds are suitable for their investment portfolio.
Top 5 Best Balanced Funds 2018 to invest in India
According to FinVizer, some of the best balanced funds 2018 are as follows:
|3yrs Return||5yrs Return||10yrs Return|
|1||HDFC Balanced fund-Growth||Moneycontrol.com
|11th Sep 2000||12.57%||11.17%||19.17%||15.39%|
|2||L&T India Prudence Fund -Direct||Moneycontrol.com
|3||Aditya Birla Sun life Balanced Fund 95-Growth||Valueresearch.com
|10th Feb 1995||10.75%||11.33%||18.53%||—|
|4||ICICI Pru Balanced Fund- Growth||Moneycontrol.com
|3rd Nov 1999||10.03%||11.34%||18.08%||12.57%|
|5||Franklin India Balanced Fund- Growth||Valueresearch.com
|10th Dec 1999||9.70%||9.55%||17.58%||—|
|6||SBI Magnum Balanced Fund||Moneycontrol.com||Dec 31, 1995||14.2%||9.5%||17.6%||—|
|7||DSP BR Eq. & Bond Fund-Direct||Morningstar.com||Jan-2013||10.9%||11.8%||17.3%||—|