Mutual funds are traditionally classified by the investment asset class
they own. Mutual funds which own only stocks (Equity) are called Equity mutual
fund. Mutual funds which own only bonds are called bond fund. Mutual funds
which own both bonds and stocks are called hybrid fund.
Balanced Mutual fund is a hybrid Mutual fund which invests in both
equity and bond. Typical Balanced fund invests 65% in stocks and 35%
in bond.
Benefits of investing in Balanced Fund:
- Balanced fund provides twin benefit of growth (from equity component) and stability (from debt component)
- Balanced fund offers automatic re balancing- Assume equity is growing faster than the bond then weight of equity crosses 65%(prescribed limit); then fund manager would book profit from equity and invest the same in bond
- Balanced fund offers lower volatility compared to an equity funds
- Balance fund offers better liquidity and more tax efficient than the bond funds
Potential return and tax effect:
- Balanced fund over last 5 years have generated a CAGR return of 15-16%; the realistic long term expectation going forward could be close to 12%.
- Balanced fund are treated as equity fund from tax perspective. Short term capital gain tax of 15% is applicable if redeemed (withdrawn) within 1 year and long term capital gain tax of 0% is applicable if redeemed (withdrawn) after 1 year
Potential risk
- Balanced fund invests 65% in equities which is subjected to market volatility and hence the fund return would be more volatile compared to a bond fund/bank FD
Conclusion: Balanced fund offers automatic re balancing which allows your investment portfolio to be more balanced in different market conditions. Balance fund offers good return, provides diversification benefit, offers flexibility and are tax efficient (long term capital gain is zero percent).Balanced fund comes handy in portfolio building and is a good option for first time equity investors.
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