Balanced Funds are funds which can invest in equity as well as debt. This feature allows them to increase safety levels compared to pure equity funds. It also allows the fund manager to adjust the equity-debt mix in accordance with market valuations.
Why invest in balanced funds
Low Risk: Balanced Funds mix equity with debt and hence lower the risk associated with a large or complete equity allocation. If the stock market falls by 10% but your balanced fund has only a 50% equity allocation, your fund will only be down by 5%.
Market Timing: Investors are constantly trying to time the market. Every 5-10% drop sparks debates about whether and how much to invest. With balanced funds, you are delegating this decision to a professional fund manager. Fund managers have experience, expertise and are assisted by teams of analysts and can take research-driven market timing decisions.
Tax free switching: Rebalancing between equity and debt by switching between equity and debt mutual funds will attract capital gains tax and possibly, exit load. However when the fund manager switches between these assets within a balanced fund, no tax or exit load is attracted. Short term capital gains tax on debt funds is as per your slab, which could be as much as 30%. Long term capital gains tax on them is 20% (with indexation). The corresponding tax rates on equity funds are 15% and 10% respectively. You are spared all these taxes when a fund manager switches assets within a balanced fund.
How to choose a balanced fund
Risk Appetite: The choice of balanced fund depends on your risk appetite. Conservative Hybrid Funds can invest only 10-25% of their assets in equities and carry a relatively low risk. Balanced Hybrid Funds can invest 40-60% of their assets in equities while Aggressive Hybrid Funds can have a 65-80% equity allocation and thus carry correspondingly higher risk levels. You might instead wish to completely leave this decision to the fund manager without any constraints. In this case, you can invest in Dynamic Asset Allocation or Balanced Advantage Funds.
Fund Performance: Choose a fund that has beaten its benchmark and peers over long periods of time. Also have a look at the debt: equity split in the portfolio. A fund may be doing well by taking on a lot more risk than its peers or its out-performance may be due to stock or bond selection.
An indicative list of high performing hybrid funds is as follows:
|Fund||1 yr returns||3 yr returns||5 yr returns|
|HDFC Hybrid Equity Fund (formed by merging HDFC Balanced and HDFC Premier Multicap||7.79%||11.87%||21.63%|
|Reliance Equity Hybrid Fund||8.69%||12.19%||20.62%|
|L&T Hybrid Equity Fund||8.07%||10.96%||20.25%|
*Direct Plans Only. Data as on 16/08/2018. Source: Value Research
The exotic options
In addition to these four ‘standard’ categories you also have three ‘exotic’ options. Equity Savings Funds and Arbitrage Funds will use derivatives to reduce the effective equity exposure below 65% of the corpus. This allows investors to get the lower tax rates associated with equity funds while actually getting an equity exposure lower than the 65% mandated by tax rules. An equity fund has lower rates of capital gains tax compared to debt funds.
A few good funds within these categories as ICICI Prudential Balanced Advantage Fund and Kotak Equity Savings Fund.
Finally, if you have some interest in gold, multi-asset allocation funds can move completely between equity, debt and gold with only a requirement of a minimum of 10% of each category in the portfolio.