Balanced Mutual Funds are equity oriented hybrid mutual fund schemes. Hybrid funds invest in multiple asset classes like equity and fixed income. Balanced Mutual Funds have at least 65% asset allocation in equity or equity related securities and the remaining portion in fixed income securities. As you may know fixed income or debt instruments as an asset class is subject to less price volatility compared to equity or equity related instruments and therefore, balanced mutual funds have a moderate risk profile compared to pure equity mutual funds like large cap mutual funds, diversified equity mutual funds and mid and small cap mutual funds.
Since stocks comprise more than 65% of the asset allocation of balanced mutual funds, they can generate decent returns for investors in the long term (say over 3 to 5 years). The fixed income allocation of balanced mutual funds serves to moderate the downside risks in volatile markets. While balanced mutual fund managers maintain equity allocation above 65% (and fixed income below 35%), they can make asset allocation calls within a certain range based on their outlook for relative valuations of asset classes (equity versus fixed income).
See the return of top performing balanced mutual funds
If fund manager thinks that equity valuations are a bit on the higher side, they will reduce their exposure to equities and increase their fixed income allocation. If fund manager thinks that the stocks he is looking to buy are cheap then they will increase allocation to equities and reduce fixed income exposure correspondingly. Active asset allocation helps balanced mutual funds deliver superior risk adjusted returns, i.e. higher returns with lower volatility.
Dynamic asset rebalancing is another benefit in balanced mutual fund investments. Balanced mutual fund managers aim to maintain equity and fixed income allocations within certain target ranges. A prolonged bull or bear market can cause equity or fixed income allocations exceed the target ranges. Balanced fund managers will then rebalance their asset allocation to bring it back within the target ranges. If stock prices run up substantially, then fund managers will book profits in stocks and re-invest in fixed income securities. Likewise, when stock prices fall substantially, fund managers will buy stocks to bring asset allocations back within target ranges. Asset rebalancing results in greater return stability for balanced mutual funds compared to riskier fund categories like diversified, large cap and mid and small cap.
Balanced mutual funds are good long term investment options (minimum 4 to 5 years) for investors with moderate risk taking ability. Balanced mutual funds are also good investment options for investors who are new to mutual fund investments and have no prior experience in investing in equities.
Balanced mutual funds offer various options to invest. Investors looking for long term capital appreciation can choose growth option. Investors looking for getting a regular cash flow from their investments can invest in dividend option. Balanced Mutual Funds generally offer either monthly dividend or quarterly dividend payment options.However, investors should note that, dividends are paid at the discretion of the Asset Management Company, both in terms of the pay-out rate and the frequency of payment.
See which balanced funds are paying the top monthly or quarterly dividends
The other way to get a regular return from balanced fund is to opt for Systematic Withdrawal Plan. Please read this – How to get regular return from your balanced funds and also try this SWP return tool
Balanced funds enjoy a major tax advantage compared to many other investment products. Though Balanced Funds may have up to 35% allocation in fixed income, they are taxed as equity funds. Long term capital gains (units held for a period of more than 1 year) are tax free. Dividends paid by balanced funds are also tax free. If you redeem balanced funds within one year then the short term capital gains tax is only 15%.
Read more about Mutual Fund Taxation in 2018
