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Balanced Fund | Meaning, Factors, Advantages and Disadvantages

Last Updated : 17 Oct, 2023
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What is a Balanced Fund?

Balanced funds are the type of mutual fund that invests in specific proportions of debt and equity segments. These funds allow investors to diversify their portfolios of mutual funds, also known as hybrid funds. Balanced funds keep a proportionality between debt and equity segments, they offer the optimal risk-reward ratio and contribute to the maximization of investment returns. Balanced mutual funds have between 40 and 60% of their asset allocation invested in equities. The most significant advantage of investing in these funds is that they assure capital appreciation and offer protection against potential risks. These funds cater primarily to investors desiring a combination of capital appreciation, income, and low-risk investment opportunities.

Features of Balanced Mutual Fund

Balanced mutual funds, also known as hybrid funds, are types of investments that seek to provide a balance of risk and return by investing in a diverse range of asset classes, most notably equities (stocks) and fixed income (bonds). These funds have a number of characteristics that make them a popular choice for investors looking for diversification and a manageable level of risk. The following are the key features of balanced mutual funds:

1. Managed by Professionals: Balanced funds are actively managed by experienced fund managers, who make decisions about investments based on their analysis of market circumstances, the economic forecast, and the fund’s objectives. They balance the portfolio from time to time to keep the asset allocation desired.

2. Dividend Income: Many balanced funds incorporate bonds in their portfolios, which pay interest on a regular basis. This income may appeal to investors seeking a consistent stream of revenue in addition to a return on capital.

3. Exit Load: Balanced funds may include exit loads, which are fees imposed if you remove your investment prior to the end of a specified holding period. Longer holding times have the potential to reduce or completely eliminate exit loads.

4. Growth: The element of equity of a well-diversified fund has the potential for long-term capital appreciation, which is capable of helping the fund’s value expand over time.

Purpose of Balanced Mutual Fund

Balanced mutual funds offer investors a diversified investment option that incorporates stocks (equities) and bonds (fixed income) within a single fund. These funds are also referred to as “hybrid funds” because they attempt to achieve a balance between the potentially greater returns of stocks and the relative stability of bonds. Here are the purposes of choosing balanced mutual funds as an investment alternative:

1. Hassle-free Investment: Balanced funds are ideally suited for investors desiring a simplified investment strategy that eliminates the need to select individual stocks and bonds.

2. Risk Sensitivity: Investors can select a balanced fund based on their risk threshold and objectives for investing. Some balanced funds are perceived as safer with a greater allocation to bonds, whereas other types are more risk-taking with an increased focus on equities.

3. Asset Allocation: The allocation between equities and bonds is actively managed by fund managers based on their evaluation of stock market conditions, economic perspective, and investment objectives. This enables modifications to take benefit of available possibilities or regulate risks as required.

4. Diversification: Balanced funds provide investors with a portfolio of stocks and fixed-income securities. This diversification serves to disperse risk and mitigate the effects of volatility in any one particular asset class.

5. Risk Management: The combination of equities and bonds can mitigate risk. Stocks have the potential for greater returns but are more volatile, whereas bonds offer stability and income. The balance of both can help mitigate portfolio risk.

Who should invest in Balanced Mutual Fund?

  • These hybrid funds allow investors with low-risk tolerances to participate in the financial market while still receiving the rewards and mitigating the dangers of doing so.
  • The benefit of investing in hybrid funds, on the other hand, is that they stick unwaveringly to their chosen investment strategy. Because of this, at times when the market is experiencing a bull run, the equity component of these top-balanced funds tends to deliver larger returns.
  • Due to the fund’s debt component, the degradation of return on investment is prevented even during periods of bear market run.

Factors to Consider Before Investing in Balanced Mutual Fund in India

As with any investment, holding investments in a balanced mutual fund in India requires careful consideration of multiple factors to ensure the fund correlates with your financial objectives, risk aversion, and investment strategy. Here are some important considerations prior to making investments in a balanced mutual fund in India:

1. Investment Goals: Clarify your financial objectives, including your goals of building up wealth, generation of income, or preservation of capital. The choice of the suitable allocation of stocks and bonds in the balanced fund is dependent upon an understanding of your individual goals.

2. Risk Tolerance: Risk tolerance should be evaluated in order to assess the level of risk associated with balanced funds, which can differ depending on their asset allocation. Individuals who exhibit risk aversion tendencies may have a preference for investment funds that possess a higher proportion towards bonds.

3. Time Horizon: It is important to take into account the duration of your investment. Balanced funds are generally considered appropriate for medium to long-term objectives, and the selection of a fund is influenced by the individual’s time horizon.

4. Exit Load: It is vital to understand the exit load associated with a fund, as it represents a cost levied in the event of an early withdrawal of one’s investment prior to a specified duration of holding. Extended holding periods have the potential to diminish or entirely remove exit loads.

5. Type of Investment: The investor must make a decision regarding the investment method, choosing between a Systematic Investment Plan (SIP) with consistent and predetermined investments or a lump sum investment.

Advantages of Balanced Mutual Fund

1. Tax Benefits: Fund managers have the opportunity to switch between debt and equity using this investment strategy without subjecting investors to a tax burden. Investors would be subject to capital gains taxation if they were to shift among the funds themselves.

2. Diversified Portfolio: When it comes to diversifying one’s financial portfolio, these funds are great choices. These funds offer investors the ideal way to reduce their investment responsibilities because they maximise profits while also acting as a shield against market-related concerns.

3. Hedge Against Inflation: Hybrid funds can function as an inflation hedge because they contain a component of debt assets. By allowing investors access to nations that have not been affected by inflation, especially if the investment includes foreign bonds, they can aid in protecting investors from price increases.

4. Fund Managers: Professional fund managers make investment decisions on behalf of investors, performing research and analysis to maximize returns. Investors profit from their experience.

5. Income Generation: Balanced funds frequently include bonds that provide a regular interest income. This can be tempting to investors pursuing both capital appreciation and an ongoing source of income.

Disadvantages of Balanced Mutual Fund

1. Moderate Risk: Although balanced funds attempt to achieve a balance between equities and bonds, they are not resistant to market turbulence. Considering the allocation of assets, they might still remain susceptible to moderate price fluctuations, which can be disadvantageous for investors with a low tolerance for risk.

2. Subject to Market Condition: The economy and market conditions might have an impact on the financial performance of a balanced fund. Even the bond part of the fund may not provide a comprehensive hedge against losses during extended market downturns.

3. Inflexible: Balanced funds’ asset allocation may not match investors’ evolving financial goals or risk tolerance. To preserve control, invest in separate equities and bond funds if require a different allocation.

4. Risk of Fund Manager: A balanced fund’s performance depends on its manager. A bad investment or asset allocation by the manager can hurt the fund’s results.

The investor needs to consider these drawbacks and whether balanced mutual funds fit their objectives and risk tolerance. Balanced funds may be right for your portfolio, depending on your needs and goals. To make smart investments, investigate and engage a financial counsellor.

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