Best Balanced Funds: Introduction, Advantages, Taxation

Going by their name, Balanced funds are a type of income funds that are bound to invest an equal proportion of their assets in bonds and stock instruments. These funds exist in the market with the objective of generating income along with the appreciation of capital.

Understanding Balanced Funds

• Balanced funds can be considered similar to income funds, only except for the fact that the former consists of multiple amounts of non-debt instruments such a common stock, preferred stock or even real estate
• Despite being conservative in nature, balanced funds yield returns that are higher than those offered by bond funds or the money market
• These funds are known to invest in a variety of holdings including high and low risk instruments
• Although the term balanced funds refer to hybrid funds in general, there is also a specific category of balanced hybrid funds defined by SEBI

Balanced funds can invest 40-60% of a fund’s portfolio in equity and the rest in debt. However, other categories of balanced funds specify different proportions of equity and debt.

Balanced/Hybrid Fund Category	Equity Proportion	Debt Proportion
Aggressive Hybrid Fund	65-80%	20-35%
Balanced Hybrid Fund	40-60%	40-60%
Conservative Hybrid Fund	10-25%	75-90%
Dynamic Asset Allocation Fund/Balanced Advantage Fund	No Limit	No Limit
Multi-Asset Allocation Fund	At least 10% in each asset class (equity, debt, gold)	At least 10% in each asset class (equity, debt, gold)
Equity Savings Fund	65% minimum but can be hedged with derivatives	10% minimum

Features of Balanced Funds

• Balanced Funds are the type of funds that invest in both equity and debt shares of a company at a balanced ratio thereby reducing an investor’s risk
• Investments made in these funds also allow the fund manager to adjust the fund’s portfolio according to market conditions
• Balanced Funds carry lower risks than pure equity funds but their returns are not guaranteed
• The dividends on balanced funds cannot be relied on for regular income because they depend on market conditions and fund manager’s skills
• Balanced funds provide a diversified portfolio to its investors as they invest in a variety of instruments such as equities and bonds
• These funds function to automatically re-balance the investor’s portfolio in case of bearish markets. This allows the fund managers to even sell equity funds in order to maintain the fund’s highest level and vice versa

Types of Balanced Funds

Balanced funds can be further classified into 2 categories-

• Equity-oriented balanced funds– These are the ones that invest a major portion of their assets in equity and its derivatives. These funds offer aggressive capital appreciation, with a comparatively lesser focus on generating interest income from debt instruments
• Debt-oriented balanced funds– These schemes invest a major portion of their assets in debt securities of a company. These funds involve relatively lesser risk as they carry the ability to generate consistent returns in the long term

Advantages of Balanced Funds

• Re-balancing– In certain cases, equity markets are overvalued when compared to debt markets and vice versa. In such situations, the fund managers have the freedom to move between the two asset classes and balance the fund’s performance against the market fluctuations. However, this is a possibility only in case of investments made in balanced mutual funds
• Risk Reduction– It must be noted that investments in equity markets involve high risk. In extreme situations, the market as a whole can even decline by huge magnitudes. On the other hand, the debt markets involve lesser risk since debt instruments tend to deliver fixed returns. In such cases, the share of investments made in debt can be increased in order to balance the fund’s performance and get away from the risk.
• Diversification of portfolio– Balanced mutual funds offer diversification in the form of a single mutual fund. The fund managers of balanced funds have the option of maintaining a diversified portfolio with investments in varied assets.  This enables the fund managers to benefit in terms of capital appreciation and reduce the burden of risk involvements.
• High returns– A strategic mix of investments in debt and equity securities makes balanced funds less vulnerable to market volatility. Equity investments of the fund help in the appreciation of capital, while debt components protect the investments from market volatility, while also extracting high returns.

Who should Invest

• Since the fund managers of balanced funds work on creating a balance between the securities, they have the option of switching from the investment made in equity to debt or vice versa, depending upon their performance. Hence, these funds  are best suited for investors with a moderately high risk appetite
• Investors of this fund must be the ones looking forward to early retirement as there is very little risk involved and no lock-in period, thereby justifying the option of high liquidity
• These funds are considered ideal for new investors since they are looking forward to recording a reasonable growth of their investments before they step into aggressive mutual fund investments. Balanced funds offer the kind of security that some new investors in the market may be seeking
• Balanced funds tend to follow a balanced strategy which ultimately leads to generating the best possible returns, irrespective of the market fluctuations and their impact on bonds and securities. Hence, these funds can be considered by conservative investors to meet their financial goals
• In comparison with debt funds, balanced funds ask for a marginal level of risk while delivering much higher returns. Hence, investors who are willing to afford such a level of risk should choose balanced funds over debt funds
• Additionally, if you are an investor who is looking forward to preserving capital in the long term, you may invest in a balanced fund which invests predominantly in large-cap stocks and high-rated bonds

Taxation

• Balanced Mutual Funds that have more than 65% in equity are taxed as equity funds. This means that for holding periods of less than 1 year, gains in balanced funds are taxed at 15% (Short Term Capital Gains Tax).
• For holding periods of more than 1 year, gains in balanced funds over Rs. 1 lakh are taxed at 10% (Long Term Capital Gains Tax). It must be noted that capital gains of up to Rs. 1 lakh on investments in balanced funds are exempt from any tax implications.
• Going by the Budget 2020, dividends on Balanced Mutual Funds face a Tax Deduction at Source (TDS)  of 10%, if the dividend amount exceeds Rs.5,000 in a financial year. Additionally, the dividend earned will now be a part of the taxable income and hence, will be taxed at the hands of the investor.

Things to be Considered

• Before you decide to invest in a balanced mutual fund, it is necessary that you set your investment objectives straight
• Considering the risk involved and the returns that these funds may generate, you may choose to invest either in equity-oriented balanced mutual funds or debt-oriented balanced mutual funds
• It must be noted that a balanced mutual fund which has a heavy investment in mid caps and long duration bonds may be a less suitable option for risk-averse investors
• Additionally, you are advised to compare the funds on the basis of their past returns and carefully study whether they have delivered a consistent performance over the long term, especially in market fluctuations

How to Invest

You can invest in overnight funds through either of the following ways-

• Offline mode of investing– If you are not confident of your knowledge, you may choose to invest through a broker. However, investing in a fund through a broker will make you eligible for investments through regular plans that offer slightly lower returns and varied expense ratios in investment. If you wish to invest in the fund independently, you must visit the nearest branch of the AMC of your fund. Don’t forget to carry the following documents-
  • Identity Proof (Aadhar Card)
  • Canceled cheque
  • Passport size photos (around 4-5)
  • PAN Card
  • KYC documents (for KYC verification)
• Online mode of investing– If you do not wish to add on to your expense of commissions or brokerage, you may visit online investment platforms (such as Paisabazaar.com) wherein you can choose from and compare more than 1,700 funds- all in one place, instead of following the long procedure of visiting the website of each AMC and then choosing from them. Here, you can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment

Suggested Read: Best Balanced Funds to Invest in 2021

Best Balanced Funds to Invest in 2021

Depending upon their 1 year returns, here is a list of the best balanced mutual funds that you may choose from-

Fund	AUM (in Crores)	1-Year Returns (in %)	3-Year Returns (in %)
Axis Children’s Gift Fund	470	20.91	12.95
LIC MF Children’s Gift Fund	12	16.98	5.09
Franklin Pension Fund	453	12.75	8.24
ICICI Pru Asset Allocator (FoF)	6,941	12.46	10.82
Tata Young Citizens Fund	187	11.49	5.97

(Data as on 17 February 2020; Source: Value Research)

FAQs on Balanced Funds

Q.What is the difference between a Hybrid fund and a Balanced Fund?

A. Balanced Fund is a sub category under Hybrid Funds. Hybrid Funds are mutual funds that invest the fund corpus in both equities and debt instruments in certain proportions. Based on higher investments in any particular asset class, it is further divided into subcategories. Balanced Funds are those which invest in both equity and debt securities at a balanced ratio, keeping the corpus exposure almost equal to both asset classes.

Also Read: How Balanced Funds differ from Balanced Advantage Funds

Q. Are Balanced Funds taxable?

A. Balanced Funds are taxed as Equity Funds (provided the equity exposure is 65%). Long Term Capital Gains (LTCG) are taxed at 10%, Short Term Capital Gains (STCG) are taxed at 15% and LTCG up to ₹1 Lakh is exempt from taxation. If the dividend exceeds ₹5,000 in a year then Balanced Funds face Tax Deduction at Source (TDS) of 10% as per the norms of Budget 2020.