If you believe in asset allocation strategy, you would know how difficult it is maintain balance between equity and debt. Every time the market rises you have to sell some equity portion and invest in debt to maintain your asset allocation.More than anything else it is a time consuming process. While entry load has been done away with, exit load still exists on redeeming before a certain time period in mutual funds. Continuously buying and selling adds to the costs and reduces the net return.How about a mutual fund that takes care of both the aspect?
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What is Balanced Mutual Fund?
A balanced fund is a category of mutual funds that allows you to invest in both equity and debt in a single investment. But contrary to what name suggests, a balanced fund does not mean that money is invested in equal proportion in equity and debt. If you blindly put in money, you are taking in a higher risk.
In fact most balanced funds have equity exposure of more than 65 per cent and the rest in debt. These are commonly known as equity oriented balanced funds. Take for instance HDFC Prudence, a balanced Fund. As of July 31, 2014, it had a equity exposure of 73.84 per cent. Similarly, SBI Magnum balanced fund too has equity exposure of 73.67 per cent. On the other hand, equity exposure in ICICI prudential balanced fund is to the tune of 70.45 All of the funds are way ahead of the 50 per cent mark perceived by most investors.
However, there performance has been noteworthy. This category has given return to the tune of 51 per cent in the last one year. The biggest reason behind such a spectacular performance of these funds is the fact that they do not have restriction on the market capitalization of the stocks they pick up. As a result most equity oriented balanced funds have lapped up mid cap stocks and are showing good performance.
When Balanced Funds are Right Choice?
If you are a first time mutual fund investor, category of balanced funds should be your first choice, according to experts. If the market is jittery at the time of your investment, the exposure to pure equity fund would be a huge disappointment for you. On the other hand, the element of debt in your chosen balanced fund would provide cushion at that time.
However, experts recommend checking equity exposure of a balanced fund before you take the plunge. A fund which has upto 80 or 90 per cent exposure in equity is as good as any equity fund and should be avoided. The later increases the risk in your portfolio.
Apart from equity oriented funds, the balanced funds are classified into following funds too.
Monthly Income Plans (MIPs)
Another category within balanced funds is Monthly Income Plans(MIPs).These are debt oriented funds where only up to 25 per cent is allocated to equity. In the last three years, they have given more than 10 per cent return. In the last one year, this category has returned on an average 27 per cent. The NAVs of these funds increases when interest rates start falling and vice-versa. Additionally, these funds give regular payouts. You should choose one with consistent dividend record.
Capital protection oriented funds
This is another category within balanced funds apart from Monthly Income Plans(MIPs). These are close ended funds that aim to offer consistent returns by investing around 80 per cent in debt and remaining in equity. They usually have defined maturity of three years. The debt portion generates a fixed return and equity offers wealth creation. However, during the term of these funds debt portion of the fund should grow to the principal amount net of fund’s expenses. Also, these funds are mandated to purchase only AAA rated debt securities to achieve their objective. You must pay attention to the fact that the liquidity is poor with such funds though they are listed at the exchanges. Also they are little costlier.
It is important to have know-how of the tax implications of the balanced funds too. So, equity-oriented funds (which invest more than 65 per cent into equities) qualify for the same tax treatment as equity funds. Here the short-term capital gains are taxed at 15 per cent, while there are no long-term capital gains taxes on them.
On the other hand, funds that majorly invest in fixed income instruments are taxed like debt mutual funds. The short-term capital gains accrued to them are taxed according to the investor’s tax slab while long-term capital gains, accrued after holding for at least 3 years, is taxed at 20 per cent with indexation. The latter is merely adjustment of purchase price with the inflation. This results in reduced capital gains and hence lower tax liability.