Introduction to Balanced Funds

When we start off with the topic of investment, Many things come to our mind. Be it banks, shares, the stock market, or sometimes even risk. But one more thing that often crosses our mind when we talk about investment is mutual funds. Mutual funds are considered to be a safer option in the world of investment. Unlike stocks or other options these mutual funds provide a variety of options from the most risky to the safest ones. Among these various types of mutual funds there is one, much talked about, and one of the most popular ones among investors.

 

It is called Balanced funds.

 

In this blog, we are going to discuss balanced funds. So should we begin? I guess this is the right time.

 

What are Balanced Funds?

 

A balanced fund is a fund that acts as a stock and bond portfolio. You can help establish long-term growth potential as well as nerve-calming risk dampening by balancing a large slug of equities with a piece of bonds.

 

The traditional balanced method is for a fund to invest 60% of its assets in stocks and 40% in bonds, while actively managed funds that are not reliant on market indexes have the flexibility to stray from the traditional 60/40 split.

 

Balanced funds are appropriate for investors with a medium-term view who want a balance of safety, income, and modest capital appreciation. The quantities invested in each asset class by this sort of mutual fund must normally stay within a certain range.

 

Balanced fund portfolios, despite being of the "asset allocation" family, do not modify their asset mix significantly. This is in contrast to life-cycle, target-date, and actively managed asset-allocation funds, which adjust their asset allocations in response to an investor's evolving risk-return appetite, age, or general market conditions.

 

How does a Balanced Fund Work?

 

A balanced fund is a diversified portfolio that you can put in place and forget about. Like a robo-advisor, you put money into the fund, which is then automatically allocated into a mix of investments depending on the fund's stated asset allocation.

 

When a balanced fund's stock or bond portion deviates too much from its general target allocation, the fund will make portfolio adjustments.

 

All balanced funds use this feature, known as rebalancing, as a strategy. During bull markets, when the stock element of the fund becomes too large a percentage of the overall fund, equities are sold and the proceeds are re-invested in the bond portion to bring the fund back into "balance."

 

When the stock part of the fund falls below its overall goal allocation in a bear market, the fund may often lighten up on bonds.

 

When it comes to rebalancing to get back to its target allocation, each fund has its unique strategy.

 

It's crucial to remember, though, that balanced funds aren't concerned with your age. A balanced fund client aged 35 receives the same stock/bond mix as a balanced fund investor aged 65.

 

(Also read: What is Investment Analysis? Types and Advantages)

 

Types of Balanced Funds

 

In general, there are two types of balanced funds:

 

1. Equity-oriented Balanced Advantage Funds

 

At least 65 percent of the assets of these hybrid funds are invested in equity and equity-related instruments. To ensure stability during uncertain market conditions, the remaining funds are put in debt securities or even money market assets.

 

2. Debt-oriented balanced funds

 

At least 65 percent of the total corpus of these hybrid funds is invested in debt securities. Investments in fixed-income instruments such as Treasury bills, debentures, bonds, government securities, and so on make up the debt component of the programme. To offer the fund a liquid component, some of it could be put in cash and cash equivalents.

 

Who Should Invest In Balanced Funds?

 

These mutual funds are appropriate for investors looking for a mix of income and moderate capital growth from their mutual fund investments. Retirees, for example, who have a low risk tolerance, can invest in these mutual funds to balance the risks and returns.

 

In general, equity mutual funds use a flexible asset allocation strategy that changes based on market conditions. Hybrid funds have an advantage over equity funds since they strictly follow their asset allocation guidelines and never exceed the mandated exposure limits. This is why, in positive markets, hybrid funds generate larger returns from their stock component.

 

How are balanced Funds taxed?

 

Balanced funds are taxed in the same way that debt funds are. If you sell your investments in these schemes before the three-year period, the profits will be added to your income and taxed according to your tax bracket. If you sell them after three years, the profits will be considered as long-term capital gains and will be taxed at 20% after indexation advantages (adjusting tax payments by employing a price index that factors in inflation).

 

Must Read: What are Investment Funds and Their Types?

 

Advantages of Balanced Funds

 

Balanced funds offer a basic approach to some of the most critical parts of effective long-term investing in an investment environment where there are literally hundreds of mutual funds and exchange-traded funds (ETFs) to select from.

 

Diversification in an instant

 

With only one investment, you can have a diversified portfolio with dozens (if not hundreds) of equities and bonds. A balanced fund can be a decent starting point if you're having trouble getting started and your long-term portfolio is sitting in cash.

 

There's no reason to fight your feelings.

 

"Buy low, sell high" is a key component of successful investing. However, selling equities while they are performing well, as well as investing more in stocks during a bear market, can be difficult. You won't have to worry about this behavioural difficulty because a balanced fund rebalances on a regular basis to keep in line with its initial asset allocation mix.

 

Funds are being rebalanced

 

When stock markets are overvalued compared to debt markets, and vice versa, there are instances when debt markets are undervalued. In such cases, the fund management has the freedom to shift between the two major asset classes (equity and debt) to protect the fund's performance from market changes.

 

Adjacent to this, please read: Understanding Key Differences Between Stocks & Bonds

 

Reduction of risk

 

Pure equities funds carry a high level of risk because the stock market can crash dramatically in exceptional circumstances. As a result, the debt component of balanced funds assists investors in balancing the risk of the equity component.

 

Inflationary protection

 

Balanced funds operate as an inflation hedge due to their unique asset allocation, in which the debt component provides consistent income while the equity component seeks higher returns.

 

Conclusion

 

In recent years, investors have become increasingly interested in balanced or hybrid funds, which offer the best of both worlds. Balanced funds can be a good place to start if you're new to mutual funds. Good luck with your investments!