BALANCED FUNDS: A MUST-HAVE IN YOUR INVESTMENT PORTFOLIO

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Balanced funds also known as asset allocation funds or hybrid mutual funds provide the much-needed cushion to an investor’s investment portfolio. These mutual funds provide diversification by investing their assets in more than one type of asset classes making them suitable for novice investors or investors with a low-risk appetite. In this article we understand why it might be a good idea to include balanced mutual funds in your investment portfolio.

What are balanced funds?

Balanced funds are a type of mutual funds that contain an equity component, a fixed-income component, and sometimes a money-market component or a cash and cash equivalent component in an explicit ratio. These mutual funds often invest in a mix of debt and equity instruments and sometimes in other types of asset classes such as gold.

Balanced funds or hybrid mutual funds are broadly classified into types – debt-oriented hybrid mutual funds and equity-oriented hybrid mutual funds. The tax implication on balanced funds is determined by the asset allocation of the fund – i.e., if the fund allots more than 65% of their assets in equity-related instruments, they are treated as equity funds and taxed similar to equity mutual funds. Similarly, if the fund allots more than 65% of their assets in debt-oriented securities, then they are treated and taxed similar to debt funds.

Advantages of balanced funds

Following are some of the benefits of investing your money in hybrid funds:

  1. Safeguard against inflation
    Owing to the unique asset allocation strategy of hybrid mutual funds wherein a part of their assets are allotted to debt securities that provides stability to the portfolio while the equity component in the fund aims to offer investors with significant returns. In this way, hybrid mutual funds work as a hedge against inflation.
  2. Re-balancing of mutual funds
    When you invest in the markets, you might come across a situation wherein the debt markets are highly glorified as compared to the equity markets or vice versa. In such scenarios, the fund managers of hybrid funds have the liberty to rebalance the portfolio composition of the fund across the two major asset classes – debt and equity. This helps fund managers to balance the balanced fund’s performance against the unavoidable market volatility and fluctuations.
  3. Helps to reduce risk
    When an investor invests solely in equity-related securities, they are exposed to a higher level of risk as the equity markets may greatly crash in adverse market conditions. Thus, the debt component in hybrid funds aids investors to reduce their risk exposure and balance out the risk possessed by the equity component in the balanced fund.
  4. Helps to diversify investment portfolio
    Investors are advised by their fund manager or financial advisors to always diversify their investment portfolio and not put all their eggs (or in this case – money) in a single basket (a single type of asset class or fund). Hybrid funds negate the need to invest in different types of funds as investment in hybrid funds offers investors with instant diversification in a single fund.