What is Balanced Fund?
Balanced Funds are the type of funds that invest in both equity and debt at a balanced ratio thereby reducing an investor’s risk. They 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 by no more guaranteed. The dividends on balanced funds cannot be relied on for regular income because they depend on market conditions and fund manager skill.
Such 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|
Advantages of Balanced Mutual Funds
Balanced Funds allow the fund manager to move between equity and debt without incurring a tax liability for investors. If the investor had to move between these funds himself, he would be subject to capital gains tax. This could be as high as 30% if the investor moves out of a debt fund within 3 years of purchase.
Sometimes equity markets are overvalued relative to debt markets and vice versa. In such a situation, the fund manager should be given the freedom to move between the two asset classes. This leeway is given in balanced mutual funds.
Equity markets are highly risky. In extreme situations, the market as a whole can decline by huge magnitude. For instance, in 2008 as the financial crisis hit India, the Nifty saw more than a 50% decline from 6,000 levels to 2,500 levels. By comparison, debt markets are less risky because debt instruments have fixed returns.
Tax on Balanced Mutual Funds
Balanced Mutual Funds which 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). Gains up to Rs 1 lakh are exempt.
Dividends on Balanced Mutual Funds face a Dividend Distribution Tax (DDT) of 10%. This tax is cut by the AMC at the time of distributing dividends and hence the dividend is tax-free in the hands of the investor.