Balanced funds are mandated to invest a minimum of 65% in equities and 35% in debt to qualify as an equity fund. It is a moderate risk approach which can work well for in and near retirement. It also works well in the time of a high-priced market where one can invest in a balanced fund for the near term and move to a pure equity fund once the market has reached reasonable valuations.
The benchmark used for balanced mutual funds has been developed by research and rating agencies recommended by the AMFI on a regular basis. Balanced funds with equity investments of 40%-60% are compared with a tailored index having 50% of its weight selected from any equity index and balance 50% from an appropriate bond return index. Almost all balanced funds use the benchmark index created by CRISIL Balanced Fund indices.
Balanced funds are categorized as an equity fund which gives it a taxation advantage despite its 35% debt allocation wherein investor is taxed at zero percent on long term capital gains after one year of staying invested in the fund.
- Rather than diversifying across multiple funds in bonds and stocks, this fund gives you the option to invest in both at the same time. It is an easier way of diversifying your portfolio and balancing it with the dynamics of the market.
- The main advantage of a balanced fund is that it acts as an equity fund in a bull market taking advantage of the market upturn by increasing equity allocation and it acts as a debt fund in the time of a market downturn by shifting to a higher debt allocation.
- It is important that the AMC follows the mandate of the fund and does not over allocate to equity to increase yields in a bull run.
- Fees charged in balanced fund are high for a MF comprising of 30-35% debt. As such, the debt component too carries a higher expenses ratio a la equity.
- If large allocations are made to cash and cash equivalents, then returns are dragged down.
|Type of tax
|Short Term Capital Gains Tax
|15% before 12 months
|Long Term Capital Gains Tax
|No Tax after 12 months
|Dividend Distribution Tax
The 5-year CAGR return in Balanced funds has ranged from 11% to 19%.
Almost all the major fund houses hold a balanced fund and hence it is important to know which balanced actually follow the required mandate and are active in reallocating the equity portion during a market rally. Using expert advice to select an appropriate mutual fund scheme among thousands will help an investor earn superior returns.