Balanced funds as the name suggests is a type of mutual fund that provides a balanced investment approach to investors and creates a risk-reward scenario. Since different investors have different risk appetites and investment approaches, not all types of funds are suitable for everyone. This is where such balanced mutual funds help investors including residents, Non-Resident Indians (NRIs), and Overseas Citizens of India (OCIs) to create a diversified portfolio without bearing much risk.
What is Balanced Mutual Funds?
Balanced mutual funds invest in a mix of equity and debt instruments to reduce the risk and provide a balanced investment approach. They invest in stocks, bonds, and sometimes a money market component to create this approach. These funds are also known as hybrid funds as they are a mix of a variety of investment instruments.
The majority of balanced mutual funds invest a larger share of the fund into equity and the remaining into debt instruments to balance out the risk and reward. They are suitable for investors who are looking for a moderate to lower-risk option and a healthy dose of return.
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Features of Balanced Funds
Here are a few features of balanced mutual funds:
- Diversification: Balance funds provide exposure to both equity and debt instruments, allowing investors to spread their risk across different asset classes. This diversification can help mitigate the impact of volatility in any single asset class.
- Lower Risk: Compared to pure equity funds, balanced funds typically carry lower risk due to their allocation to debt securities. This makes them suitable for investors seeking a moderate level of risk with potentially higher returns than traditional fixed-income investments.
- Income Stream: Since balanced funds have a bond component, this acts as an income stream and helps in moderating the volatility of the portfolio. The bonds like AAA corporate bonds and other money market instruments offer periodic payments, giving investors a passive income.
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Types of Balanced Mutual Funds
Balanced mutual funds are classified into two types:
- Equity-oriented balanced funds: These funds initially invest 65% or more of their funds in stocks and equity-related assets. The remaining portion is then invested in debt instruments or money market securities to help stabilize the fund’s performance during unstable market periods.
- Debt-oriented balanced funds: These hybrid funds primarily invest at least 65% of their total funds in debt securities. These include various fixed-income instruments like treasury bills, bonds, and government securities. Some portion of the fund may also be kept in cash or cash equivalents for liquidity purposes.
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Taxation on Balanced Mutual Funds
The taxation rate for capital gains on hybrid or balanced funds depends on the equity exposure within the portfolio. Should the equity exposure surpass 65%, the fund scheme is subject to taxation similar to an equity fund; otherwise, the taxation rules applicable to debt funds come into play. Here’s a brief of these:
- Equity-Oriented Balanced Mutual Fund Taxation: In the case of hybrid equity-oriented mutual funds, any holding of less than one year will be termed as short-term, and selling of such investment will carry a short-term capital gain (STCG) of 15%. Similarly, for equity mutual fund investments held for more than a year, long-term capital gains (LTCG) up to 1 lakh per year will be exempt. Any LTCG above Rs 1 lakh will be levied at 10% without any indexation benefit.
- Debt-Oriented Balanced Mutual Fund Taxation: After the Budget 2023 amendments, long-term capital gains in debt funds won’t enjoy any indexation benefit and will be charged as per the investor’s slab rates removing the LTCG benefits altogether. As such any gains arising from debt funds will now attract taxation on applicable slab rates of the investor’s income bracket.
Also read: NRI Mutual Fund Taxation in India 2024 Explained
Who Should Invest in Balanced Funds?
Balanced funds, with their mix of equities and fixed-income securities, appeal to a broad range of investors. Here are some types of investors who might find balanced funds suitable:
- Conservative Investors: Individuals who prioritize capital preservation and are more risk-averse may find balanced funds appealing. The allocation to fixed-income securities provides stability and income, which can help cushion the impact of market volatility.
- Moderate Risk-tolerant Investors: Investors seeking a balance between growth potential and risk mitigation may find balanced funds suitable. The combination of equities and fixed-income securities offers the potential for capital appreciation while limiting downside risk.
- Income-oriented Investors: Balanced funds often provide regular income distributions through dividends and interest payments from fixed-income investments. Income-oriented investors looking for a steady stream of cash flow may find balanced funds attractive.
How to Invest in Balanced Mutual Funds as NRI/OCI
NRIs can legally invest in balanced mutual funds in Indian markets. This includes NRIs, Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCIs). There are a few legal mandates like getting their Mutual Fund KYC done along with adhering to the rules of FEMA, SEBI, and RBI. Once your KYC is done, you can invest in domestic and international mutual fund schemes offered by Asset Management Companies (AMCs).
Getting your Mutual Fund KYC is mandatory to open an account to invest in mutual funds in India irrespective of the investment amount. The Securities and Exchange Board of India (SEBI) has specified a set of regulations under the Prevention of Money Laundering Act (PMLA), 2002 which mandates that mutual fund houses and intermediaries perform their due diligence on investors before they are compliant to make investments.
For more info on NRIs, PIOs, and OCIs, you can refer here.
Also read: Step-by-Step Guide for NRIs to Pick a Winning Mutual Fund
Wrapping Up
Balanced funds offer a balanced approach to investing, combining the growth potential of stocks with the stability and income generation of bonds. Whether you’re a conservative investor seeking steady income or a moderate risk-taker looking for growth opportunities, balanced funds can be a valuable addition to your investment portfolio. With the benefits of diversification, risk management, steady income, and professional management, balanced funds provide investors with a convenient and effective way to achieve their financial goals.
Invest in NRI Mutual Funds with SBNRI
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SBNRI is an authorized Mutual Fund Distributor platform & registered with the Association of Mutual Funds in India (AMFI). ARN No. 246671. NRIs willing to invest in mutual funds in India can download the SBNRI App to choose from 2,000+ mutual fund schemes or can connect with the SBNRI wealth team to better understand Mutual Fund investments.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions. SBNRI does not intend to predict future returns, please read all related documents before investing.
FAQs
What does balanced fund mean?
Balanced mutual funds invest in a mix of equity and debt instruments to reduce the risk and provide a balanced investment approach. They invest in stocks, bonds, and sometimes a money market component to create this approach.
Is a balanced fund a good investment?
Balanced funds are a good investment for investors having a lower risk appetite or tolerance. Since these funds invest in a mix of equity, bonds, and other money market instruments, this balances out the risk and creates a regular income stream alongside wealth appreciation. They are suitable for conservative investors, investors with moderate risk profile and other investors who want a regular income stream.
Which is better equity or balanced fund?
Balanced funds are a good investment for investors having a lower risk appetite or tolerance. They are suitable for conservative investors, investors with moderate risk profiles, and investors who want a regular income stream while equity mutual funds are suitable for investors with high-risk profiles and who want a higher return.
What are balanced funds characteristics?
Balanced funds typically invest in a mix of stocks and bonds to provide both growth potential and stability. They automatically adjust their portfolio to maintain a desired asset allocation, making them suitable for investors seeking diversification and risk management in one investment.
What is the difference between income fund and balanced fund?
Income funds primarily focus on generating regular income through investments in fixed-income securities like bonds and money market instruments. In contrast, balanced funds invest in a mix of stocks and bonds to provide both income and growth potential.
Are balanced funds volatile?
Balanced funds invest in a mix of equity, bonds, and other money market instruments. Hence they are less volatile than equity mutual funds.
Are balanced funds fixed income?
Balanced funds contain a mix of equity, bonds, and other money market instruments. Hence, they have a mix of fixed-income investments and other equities.
Is balanced fund a debt fund?
The taxation rate for capital gains on balanced funds depends on the equity exposure within the portfolio. Should the equity exposure surpass 65%, the fund scheme is subject to taxation similar to an equity fund; otherwise, the taxation rules applicable to debt funds come into play.
Are balanced funds high-risk?
Since balanced funds invest in a mix of equities, bonds, and other money market instruments, these are generally moderate to lower-risk funds.
Are balanced funds taxable?
The taxation rate for capital gains on balanced funds depends on the equity exposure within the portfolio. Should the equity exposure surpass 65%, the fund scheme is subject to taxation similar to an equity fund; otherwise, the taxation rules applicable to debt funds is applied.
What do balanced funds invest in?
Balanced funds invest in a mix of equity, AAA corporate bonds, and other money market instruments.
What are the disadvantages of balanced mutual funds?
Here are the advantages of balanced mutual funds:
- Moderate Risk.
- Subject to market conditions.
- Risk of fund manager.
- Inflexible
