Balanced mutual funds, as the name suggests, are a type of income fund which invest equally in bond and stock instruments. The primary objective of these funds is generation of income, along with appreciation of capital. Managed by fund managers, these funds are best suited for investors who have moderate risk-taking appetite and are looking forward to an early retirement.
Balanced funds are quite similar to income funds, except that they consist of multiple amounts of non-debt instruments like common stock, preferred stock or sometimes even real estate. These funds typically yield returns which are higher than those offered by bond funds or the money market, despite being conservative, and invest in a variety of holdings including high and low risk instruments. Like any other investment, it is important for the investor to find out about the fund before investing. Here, we talk about some of the defining features of balanced funds and the top balanced funds currently available in India for investors.
Who Can Make Investments in Balanced Funds?
Balanced funds can be considered by the following kind of investors:
- New investors: Investors who are putting their money into mutual funds for the very first time tend to turn to ELSS due to the tax benefits it offers. Apart from the tax benefits that ELSS offers, balanced funds are ideal investment options for new investors. This is because both equity and debt instruments are balanced in their portfolio, thereby ensuring that investors can watch their investment record reasonable growth whilst keeping their principal investment amount protected.
- Conservative investors: Balanced funds are great options for conservative investors like retired people and those who want a long-term safe haven investment instrument. The reason why a large number of such investors consider balanced funds is due to the fact that they follow a balanced strategy which enables them to get the best possible outcome regardless of whether or not bond or equities markets are affected.
- Investors who want better returns than investments in debt funds: Debt funds tend to provide returns of around 10% on average, but some investors don’t mind taking on some additional risk, albeit marginal, to earn considerably higher returns. If you are one of these investors, balanced funds can work out to be very profitable.
Different types of Balanced Funds
Balanced funds are essentially divided into two types:
- Equity-Oriented Balanced Funds: The portfolio of equity-oriented balanced funds usually invests majority of the money into equities and equity derivatives. Most of the capital in such a scheme is invested in several different money market and debt instruments. The capital appreciation in equity-oriented balanced funds is aggressive as it is the main focus of these funds, with interest income from debt instruments taking the back seat. Despite the fact that regular equity mutual funds and equity-oriented balanced funds offer similar returns, the risk associated with equity-oriented balanced funds is relatively lower, thereby making them attractive options.
- Debt-Oriented Balanced Funds: Debt-oriented balanced funds are ideal investment options for conservative investors. A large part of the money in the portfolio of debt-oriented balanced funds is put into debt and money market instruments. The risk involved with these funds is relatively low, and they have the potential to provide consistent long-term returns. In addition, the portfolio’s equity part can aid the fund in making the most of the increasing equity capital markets whilst protecting the debt instruments from inflationary and interest rate risks.
Features of Balanced Funds
- Diversifying Portfolio - Balanced funds allow investors to diversify their portfolio as they invest in a variety of instruments like equities and bonds.
- Yield Good Returns - Balanced funds will yield sizeable returns owing to the fact that they invest a major portion in equities.
- Portfolio Re-balancing – Balanced funds function to automatically re-balance your portfolio, something which can be a blessing when the markets may be unstable. For this reason, fund managers will sell equity funds to maintain the fund’s highest level and vice versa.
Taxation of Balanced Funds
Equity-oriented balanced funds and debt-oriented balanced funds are subject to different taxation laws based on portfolio composition. Laws applicable to equity mutual funds shall apply to equity-oriented mutual funds, while debt-oriented balanced funds will be subject to non-equity investment laws.
- Taxation of Equity-Oriented Balanced Funds
- Taxation of Debt-Oriented Balanced Funds
Under the current tax laws, investments made in equity-oriented balanced funds for a period of less than one year from the date on which the units are allocated, will be considered as short-term investments. Units that are held for a timeframe longer than one year will be considered as long-term investments and these will be taxed as per the regulations proposed by the Union Budget 2018. In case the units of a fund are switched or redeemed before the completion of one year from the date on which they were allotted, the tax rate applicable to the profits will be 15%. These funds are exempt from long-term capital gains tax.
If the units of a debt-oriented balanced fund are switched or redeemed before the end of three years from the date on which they were allotted, the profit made through them will be subject to short-term capital gains. The rate of tax applicable to short-term capital gains on debt-oriented mutual funds shall be equivalent to the income tax slab under which the investor falls. In addition, since TDS will not be deducted on the redemption of units, the short-term capital gains earned will be considered as “income from other sources”. A tax rate of 20% will be charged as long-term capital gains if a debt-oriented balanced fund is switched or redeemed after a period of three years, provided the indexation benefit is available. In case the indexation benefit is not availed, the tax rate applicable to the profits on a debt-oriented balanced fund that is switched or redeemed after three years will be 10%.
Top Balanced Mutual Funds
Here are five of the best balanced funds you can invest in:
- Aditya Birla Sun Life Equity Hybrid ‘95 Fund - Direct
- Franklin India Equity Hybrid Fund - Direct Plan
- HDFC Children’s Gift Fund
- ICICI Prudential Balanced Advantage Fund - Direct Plan
- Kotak Equity Savings Fund - Direct Plan
Aditya Birla Sun Life Equity Hybrid ‘95 Fund - Direct is a hybrid: equity-oriented scheme that aims at generating capital appreciation over the long term and providing current income to investors via investments in a portfolio comprising money market, equity, and debt instruments. The top equity holdings of the scheme include HDFC Bank, ICICI Bank, Infosys, Larsen & Toubro and Maruti Suzuki India among others. The top debt holdings of the scheme include TMF Holdings 2019, Shriram Transport Finance 2019, Indiabulls Housing Finance 2021, etc.
Franklin India Equity Hybrid Fund - Direct Plan is a hybrid: equity-oriented scheme that aims at achieving capital appreciation in the long term in addition to providing current income to investors via investments in a balanced portfolio consisting high quality fixed income and equity instruments. The top equity holdings of the scheme include Kotak Mahindra Bank, HDFC Bank, Axis Bank, Mahindra & Mahindra, etc. The top debt holdings of the scheme include GOI 2028, Hinduja Leyland Finance 2019, Export-Import Bank 2099, JM Financial Products 2019, etc.
HDFC Children’s Gift Fund is a hybrid: equity-oriented scheme that aims at generating income and capital appreciation via investment in a portfolio consisting equity and equity-related securities as well as money market and debt securities. The top equity holdings of the scheme include HDFC Bank, Reliance Industries, ICICI Bank, Larsen & Toubro and Infosys among others. The top debt holdings include Axis Bank 2022, GOI 2027, TMF Holdings 2018, Tata Sons 2024, etc.
ICICI Prudential Balanced Advantage Fund - Direct Plan is a hybrid: equity-oriented scheme that aims at offering income distribution and capital appreciation to investors via the use of arbitrage opportunities, derivatives strategies and investment in pure equity instruments. The top equity holdings of the scheme include HDFC Bank, Infosys, Hindustan Unilever, Axis Bank and ITC among others. The top debt holdings of the scheme include HDFC, GOI, ICICI Bank, Indusind Bank, etc.
Kotak Equity Savings Fund - Direct Plan is a hybrid: equity-oriented scheme that aims at generating income and capital appreciation via investment mainly in arbitrage opportunities in the derivatives and cash segments of the equity market. It also invests partly in equity and equity-related securities. The top equity holdings of the scheme include Tata Consultancy Services, Jindal Steel & Power, Power Finance Corp., GMR Infrastructure and Indiabulls Housing Finance among others. The top debt holdings of the scheme include Kotak Mahindra Prime, Axis Bank, M&M Financial Services, HDFC Bank, IDFC Bank, etc.
Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.
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