Balanced Funds - A Smart Way to Start With Equity Investments?

Written on Saturday, April 22, 2017
By Mitali Sharma

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Thinking about entering equities, yet feeling hesitant? Equity Mutual Funds have the potential to offer higher returns and many investors want to explore it. But since these are market linked, so risk-averse investors or newbie investors feel hesitant or perplexed about how to start with equity investments. Here, Balanced Funds (or equity-oriented hybrid funds) can be the stepping stone for all such investors.


What are Balanced Funds?

As the name suggests, a balanced fund is meant to create a balance by combining an equity component and a debt component in a single portfolio. Balanced funds vary in terms of the ratio of the component orientation.

Advantages of Balanced Funds

A balanced fund is a good investment option as it gives the advantage of asset allocation by providing exposure to both equity and debt funds.

Even those investors who have small amounts of money to invest can choose Balanced Funds. Taking the Systematic Investment Plan (SIP) route, one can invest small amounts on a monthly basis.

The benefit of rebalancing is another major advantage. Your balanced fund may have a 65:35 or 70:30 exposure to equity and debt. But if at any point of time the asset allocation goes out of sync, then there is a flexibility to rebalance the investor's portfolio by adjusting the ratio between equity and debt.So the exposure ratio chosen by you is not rigid and the fund manager keeps rebalancing to enhance the performance of the fund.

Balanced funds come along with Tax benefits because in regard to tax purposes it is treated at par with equity funds. As you know, capital gains from Equity funds are tax-free after one year but debt funds get taxed as per norms. However, in the case of a balanced fund, even the debt component accounting up to 30% to 35% is treated like equity and thus escapes the taxation after one year of investment.


How is a Balanced Fund Different from Equity-income Fund?

As mentioned above, the Balanced fund is a good choice for that investor who wishes to explore the equity not in a complete way but in a partial way. But balanced funds are not the only kinds of funds that offer partial exposure to equity. The other categories of such funds are equity-income funds or equity-saving funds. It is important for investors to understand the difference between balanced funds and the other similar categories of funds.

Equity-income funds or Equity-saving funds have lower exposure to pure equities. The percentage usually vary from 35-40% and they invest in arbitrage opportunities. Combining the pure equity component and the arbitrage portion makes up at least 65 percent of the portfolio on an average.

So, the equity exposure of balanced funds is more in comparison to equity-income funds. Investors, investing for more than five years may opt for balanced funds and those, who are investing for a shorter time horizon like three-four years may opt for equity-income funds.

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