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What are Balanced Funds? Research Team | Posted On Monday, January 28,2019, 03:39 PM

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What are Balanced Funds?



What are Balanced Funds?

Balanced funds are also known as hybrid funds. These types of funds invest in both equity and debt. These funds are managed by fund managers who allocate according to the conditions of the market. These funds carry lesser risk compared to equity mutual funds and are suitable for investors with moderate risk appetite. The aim of balanced funds is to generate income as well as appreciation of the capital.

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What are Balanced Funds?

Features of Balanced funds in India:

Investing in Balanced funds can be done to fulfil short term financial goals. Balanced funds are also one of the best investment options for new entrants in the share market. Given below are some of the features of balanced funds:

  • Moderate risk profile: the balanced funds carry a moderate risk profile as they invest in a variety of financial instruments like equity, government bonds, fixed income assets and so on.
  • Portfolio balancing: the investment portfolio can be balanced depending on the market fluctuations. The fund manager has the authority to sell shares and vice versa during unstable market conditions to maintain a balance.
  • Yield good returns: the balanced mutual funds yield good returns as they have an equity component.  

Balanced funds in mutual funds:

Balanced funds are a type of mutual fund. It is a type of mutual fund that invests in different asset classes. Balanced funds are a perfect blend of debt and equity. Balanced funds have a lower risk profile as compared to equity mutual funds. By managing the funds in an efficient manner, the risk factor and the returns on a balanced mutual fund strike a perfect balance. They help the investor generate income as well as maintain a low risk on investments.

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Balanced funds taxation:

The taxes imposed on balanced funds depend on the orientation of the funds. If the balanced funds are equity oriented, where equity component is 65% and above, they are taxed like pure equity funds. The taxes imposed on these funds also depend on the tenure of the funds. If the funds are purchased with holding period of less than a year, then the gains are taxed at 15% as per short term capital gains tax. For a holding period of more than a year, long term capital gains are taxed at 10%.

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Balanced funds vs equity funds:

Equity funds are invested in stocks. These are high risk funds that allow the investors, earn high returns.

Equity hybrid funds invest more than 65% of their assets in equities and the rest in fixed income like Government bonds, Corporate Bonds and Company debentures. The debt hybrid funds do not provide returns as high as equity funds and are less risky. The debt investment brings stability to the fund and helps in balancing during market fluctuations.

Advantages of balanced funds:

Outlined below are some of the advantages of balanced funds:

  • Tax efficiency: Balanced funds allow investors take the risk free option, where the investments are moved between equity and debt. By doing so, the investors do not have to carry a tax liability. The funds are managed by the fund manager who adjusts the portfolio based on the market fluctuations. This helps the investor save on taxes.
  • Balancing: Due to market fluctuation, the asset allocation changes. As the fluctuations take place frequently, the fund manager adjusts the portfolio by moving between different asset classes. This kind of fund management is only possible in balanced mutual funds.
  • Risk reduction: The stock market is highly risky and subject to fluctuations. The equity market therefore is an unstable market that can decline by a huge magnitude due to extreme market conditions. The debt market is comparatively stable and less risky as the debt instruments have fixed returns. So, balance funds help in risk reduction. 

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