What are Balanced Mutual Funds ?

balanced mutual funds

                                 “Take a simple idea and take it seriously”: Charlie Munger

Mutual funds, when taken in reference to this quote by Mr. Munger, become quite a boon for the passive investor. Simple products, with a diverse range of categories, that can be chosen on the basis of investment horizon, funds invested and one’s risk appetite.

The latter among the three, risk appetite, is what that classifies Balanced Mutual Funds as a class apart investment. Also known as hybrid mutual funds, balanced funds’ ultimate aim is to get the best of both worlds of equity and debt instruments. However, the term “balance” is a misnomer as the ratio of debt and equity instruments is not always equal.

Equity is usually sharing a heavier side on these mutual funds. The main reason for the same is not just greater profits, but also avoiding taxation.

This mutual fund tends to invest into stock and debt based investments, thus optimising risk and return to their best. Reduced volatility with good returns, how do these funds work? For whom are these funds recommended? What is the best strategy to invest in these funds? Let’s find out!

Types of Balanced Mutual Funds

Depending on the allocation into debt and equity types, balanced mutual funds can be categorized into the following:

  • Equity Oriented Mutual Funds, &
  • Debt Oriented Mutual Funds

As the name suggests, equity oriented mutual funds are having more share towards equity and its derived products. Debt based investments, such as bonds, debentures etc., find a minor share in these mutual funds.

On the contrary, debt oriented mutual funds have major part of their kitty invested into bonds, notes, certificates etc., and equity gets the lesser share.

Equity oriented balanced mutual funds enjoy the benefit of tax rebates while offering higher degree of risk when compared to their debt counter parts.

How Do Balance Mutual Funds Work?

  • The debt and equity components of a balanced mutual fund have a lower and an upper limit. The fund managers are responsible to create the portfolio in such a manner that they encompass best out of the both.
  • Availability of two different investment segments makes rebalancing a critical part of balanced mutual funds. Active rebalancing of the fund in order to reap maximum benefits out of it, defines the ability of the fund manager.
  • The debt instruments assure consistent interest for the fund, while the fund manager can deliver his promises working on fetching good returns on the equity instruments.
  • Thus, the returns of a balanced mutual fund are not as high as that of any equity mutual fund, but the risk is also reduced when compared to them.
  • The ratio of debt and equity instruments vary as per market conditions. However, taxation also plays a strong role in balanced mutual funds.

Who Should Invest in Balanced Mutual Funds

These funds attract those investors more who are more inclined towards safety of investment along with average to good returns on it. In other words, these funds are for those who seek a safe and thrilling ride in the markets. The ride and thrill can be taken for a thought when choosing between equity and debt oriented balanced mutual funds.

These funds are recommended for the young and middle aged investors who seek medium to long term investment instruments. Being not too risky, these funds are more preferred while targeting a particular goal such as down payment for home loan or buying a car, which one plans to achieve in medium terms.

How to Choose a Balanced Mutual Fund

Not all balanced mutual funds are alike. The fund managers have different investment strategies, different risk perceptions and have several instruments to create their portfolio.

Though there are multiple sources of information along with genius fund advisors and robo advisors, a few tips can be followed every time while choosing the fund. A potential investor should check out the past performance of the fund, the review of its fund managers and the major sectors and companies in which the fund has invested. These simple checks will eventually lead you to not only choose the best fund, but also chalk out a plan when you consider the risk and returns of the fund.

In the times when the markets become volatile, balanced funds become a highly recommended investment choice. The fund managers, then, have flexibility to switch from equity to debt and can also use hedging instruments such as call and put to minimize their risk.

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