Best Balanced Mutual Funds
For a long time, investment experts have recommended balanced mutual funds to both first-time investors and even those who have a low risk appetite. This is because if you are a first-time investor, you might not be prepared to lose money during a volatile phase in the market. Even if you face it head-on, it might discourage you to never invest in the future! This is where balanced mutual funds come to your rescue.
So let’s find out what these balanced funds are and if it’s a good idea to invest in them:
What are balanced funds?
If you are a dilemma and do not know if equity or debt is better for you - then it is best to invest in a hybrid or balanced mutual fund. Of course, your age, risk appetite and the current market conditions play an important role. As an investor, if you are looking for diversification of your portfolio, then balanced mutual funds are your best bet. You can also re balance your portfolio on a regular basis.
When you decide to go for these funds, remember you can enjoy the benefits of both worlds, and at the same time, have a low-risk profile. What happens is that your money is invested in both equity and debt instruments (in a specific ratio) - this helps you to reap the rewards of diversification.
Are these equity or debt-oriented?
Now that’s a valid question. Your funds can either be equity or debt-oriented. If it’s equity-oriented, then a minimum of 65% of assets are in equities and the remaining in debt. If it’s the other way round, then 65% of assets are invested in debt, while the rest are in equities. A big advantage of these funds is that while all other kinds of mutual funds change asset allocation based on the highs and lows in the market; in the case of balanced funds, they behave in line with this ratio.
The`good part is if the market is in a bullish phase, you can reap high returns (thanks to equity); when the market is bullish, the debt component provides a safety net.
Things to remember when going for a balanced fund
If you’ve decided to go for a balanced fund, here are a few things you must keep in mind:
Risk appetite
It must be understood that these funds are not free from risk - yes, the debt component does offer some cushion, but there is an equity component that reacts to market fluctuations. The idea is to know that the risk is not as high as pure equity funds. To get the most out of balanced funds, make sure you keep re balancing the portfolio from time to time.
Moderate returns
As mentioned above, these funds are suitable for those investors who are not willing to take high risks. Historically, those balanced funds that are inclined towards equity have found to deliver moderate returns, generally to the tune of 10-12%. Some of you may ask, why moderate returns? This is because of the equity component that does fluctuate when the market goes through different cycles. Despite that, you know you’re going to get moderate returns - it gives a sense of security!
Expense ratio
When you go for balanced funds, there’s an annual fee that you must incur, called the expense ratio. By definition, it reflects the operating efficiency of the fund and forms an important criterion, especially when you have to select funds. When you decide to invest in balanced funds, make sure you check the expense ratio. If it has a low expense ratio, it is more advantageous - this is because you will have a higher take-home!
Advantages of Balanced Funds
Here are a few advantages of balanced funds:
Low risk: This is a huge advantage and one of the primary reasons why investors go for balanced funds. When the market is bullish, you can increase your exposure to equity, but when it is bullish, you can do the opposite. Balanced funds offer great flexibility and give the opportunity to re balance your portfolio from time to time!
Low risk: This is a huge advantage and one of the primary reasons why investors go for balanced funds. When the market is bullish, you can increase your exposure to equity, but when it is bullish, you can do the opposite. Balanced funds offer great flexibility and give the opportunity to re balance your portfolio from time to time!
Perfect for medium-term financial goals: If you have medium-term financial goals that can be fulfilled within five to seven years, then balanced funds are the perfect fit. Again, this works well for those who have a low risk appetite, but want a steady stream of income over a certain period.
Taxation benefits: Those funds that have 65% of their assets allocated in equities are taxed as equity funds. You can enjoy tax-free returns on these, in case you hold them for more than a year. In any other case, they are subject to short-term capital gains tax. Some investors also go for the dividend options, since dividends are tax free.
The verdict
Balanced funds are great for wealth creation without putting all the money in equity funds. The idea is to passively invest in equities and at the same time, averting risks in volatile market conditions. Of course, the returns achieved are moderate, but all in all, consistent returns are preferred over sharp losses. Keep re balancing funds to maximize return and reduce risk.
