Balanced funds: Best of equity and debt in a single fund
In the long run, equities have the potential to give inflation-beating high returns. However, equities are volatile in the short run. Debt can give stability to the portfolio when equity markets are volatile or falling. What if investors can get the best of equity and debt in a single mutual fund scheme? Balanced mutual funds provide you with that.
What are balanced mutual funds?
A balanced mutual fund is an open-ended mutual fund scheme that invests in a mix of equity and debt instruments. Depending on the equity proportion, balanced mutual funds are further sub-categorized as:
- Balanced hybrid fund: It invests 40 to 60% of its total assets in equity and equity-related instruments. The debt component ranges from 40 to 60% of total assets. As the equity component is less than 65%, a balanced hybrid fund is taxed as a debt fund.
- Aggressive hybrid fund: It invests 65 to 80% of its total assets in equity and equity-related instruments. The debt component ranges from 20 to 35% of total assets. As the equity component is always higher than 65%, an aggressive hybrid fund is taxed as an equity fund.
As per SEBI guidelines, a mutual fund house can offer either a balanced hybrid or an aggressive hybrid fund.
The above table shows the best balanced mutual fund has given a return of 19.85% CAGR in the last five years, which is a very good return.
Who should invest in balanced mutual funds?
Investors looking to diversify their investment portfolio into equity and debt instruments with a single mutual fund scheme can consider investing in a balanced mutual fund scheme. However, you need to decide whether you want to invest in a balanced hybrid fund that will give you 40 to 60% equity exposure or an aggressive hybrid fund that will give you 65 to 80% equity exposure.
An aggressive hybrid fund is suitable for investors willing to take high risks. A balanced hybrid fund is suitable for investors with a little lower risk appetite.
Taxation of balanced mutual funds
For taxation purposes, an aggressive hybrid fund (equity exposure of more than 65%) is treated as an equity scheme and taxed accordingly. On the other hand, a balanced hybrid fund (equity exposure less than 65%) is treated as a debt scheme and taxed accordingly.
Taxation of aggressive hybrid funds
- Short-term capital gains (STCG) tax: If you sell your aggressive hybrid fund units within twelve months of purchase, the capital gain will be classified as short-term capital gain (STCG). The short-term capital gain (STCG) tax will be levied at 15%.
- Long-term capital gains (LTCG) tax: If you sell your aggressive hybrid fund units after twelve months of purchase, the capital gain will be classified as long-term capital gain (LTCG). Every financial year, the first ₹1 lakh long-term capital gain will be exempt from taxation. The incremental long-term capital gain above ₹1 lakh will be taxed at 10%.
Taxation of balanced hybrid funds
- Short-term capital gains (STCG) tax: If you redeem your balanced hybrid fund units within thirty-six months of purchase, the capital gain will be classified as short-term capital gain (STCG). The short-term capital gain (STCG) will be added to your overall income and taxed as per the income tax slab that you fall in.
- Long-term capital gains (LTCG) tax: If you redeem your hybrid fund units after thirty-six months of purchase, the capital gain will be classified as long-term capital gain (LTCG). The long-term capital gain (LTCG) tax will be levied at 20% with indexation benefit and 10% without indexation.
Risks involved in balanced mutual fund schemes
In the case of balanced funds, the risk varies depending on whether you have invested in an aggressive or balanced hybrid fund. Both funds are riskier due to the equity component. However, the aggressive hybrid fund is riskier due to the higher equity component (65 to 80%) than the balanced hybrid fund with a lower equity component (40 to 60%).
Return potential of balanced funds
Both aggressive and balanced hybrid funds have equity exposure, although the percentage varies. In the long run, equities have the potential to give inflation-beating high returns. Hence, balanced funds also have the potential to give inflation-beating high returns. Balanced funds can create wealth for you in the long run and help you achieve all your financial goals.
Advantages of balanced mutual funds
The biggest advantage of a balanced fund is that it gives you a combination of equity and debt in a single mutual fund scheme. The equity component has the potential to give inflation-beating high returns. When equity markets are falling, the debt component cushions its impact on the scheme’s net asset value (NAV). The debt component provides stability to the fund when equity markets are volatile.
Reasons to Invest in hybrid mutual fund schemes
Some of the reasons for investing in hybrid mutual funds schemes include:
- You get an equity exposure ranging from 40% to 80%, depending on whether you choose an aggressive or balanced hybrid fund. The equity asset class has the potential to create long-term wealth. The fund manager includes debt securities beyond equity allocation. It can provide a diversified portfolio with a mix of equity for growth and debt for stability.
- Diversified exposure to a mix of equity and debt in a single mutual fund scheme. As per the asset allocation strategy, an investor should invest in a diversified set of asset classes such as equity, debt, gold, real estate, etc.
However, please note that hybrid mutual fund schemes carry high risk due to their exposure to equities that can be volatile in the short run. Hence, you should consider investing in hybrid mutual fund schemes only if you have a risk appetite and a long investment horizon.
Disclaimer: This blog has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The information/data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice/ recommendation to any party of solicitation to buy, sell or hold any investment. All opinions, figures, estimates and data included in this blog are as on date. The blog does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers should exercise due caution and / or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein and shall be fully responsible/liable for any decision taken on the basis of this article.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.