Balanced Funds Meaning
Balanced Funds are the funds which invest the money in the mix of both stocks and the bonds with the aim of achieving the high rate of return on the funds along with balancing the risk with the help of the diversification and these funds generally have more risk when compared with the fixed income funds but the less risk when compared with the pure equity funds.
In India, balanced funds generally have 30%-40% of its investment in Equity and the remaining in Bonds and (or) other debt investment instruments. These funds, like others, are also impacted by the movements in the stock markets as a specific portion is equity-oriented. However, the values of these funds as a whole are to be less volatile in comparison to a 100% equity fund.
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For eg:
Source: Balanced Funds (wallstreetmojo.com)
Balance Funds Suitability
It is an ideal option of investment primarily for investors who are either
- looking for a stable and steady return with mid-term investment holding/return gain period (say five years)
- new entrants to the investor’s group with no or limited investment knowledge
- looking for diversification in investment avenues
- Requires to withdraw while maintaining investment.
It would not be an ideal option of investment primarily for investors who are either.
- Willing to take or can manage higher risk
- Looking for a high return for their investments
- Looking to invest in a specific choice of the fund since the selection of funds remains with the fund manager.
Examples
Mr.Raj wishes to invest a sum of Rs.1,00,000
Suppose Raj is a less risk taker and isn’t willing to take a high risk with his investment choice. He might hold a diversified investment portfolio as per the below table.
| Investment Avenues | Investment % | Average Return % | Investment Value | Average Return |
|---|---|---|---|---|
| Government Bonds | 55% | 2.50% | 55,000 | 1,375 |
| Corporate Bonds | 30% | 4.00% | 30,000 | 1,200 |
| Equity | 15% | 18% | 15,000 | 2,700 |
| Total | 100% | 8.17% | 1,00,000 | 5,275 |
Debt Oriented Fund
Suppose Raj is a risk-taker and is willing to take a high risk with his investment choice. He might hold a diversified investment portfolio as per the below table.
| Investment Avenues | Investment % | Average Return % | Investment Value | Average Return |
|---|---|---|---|---|
| Tech Stocks | 25% | 18% | 25,000 | 4,500 |
| Pharma Stocks | 25% | 16% | 25,000 | 4,000 |
| Telecom Stocks | 25% | 17.50% | 25,000 | 4,375 |
| Government Bonds | 15% | 2.50% | 15,000 | 375 |
| Corporate Bonds | 10% | 4.00% | 10,000 | 400 |
| Total | 100% | 13.50% | 1,00,000 | 13,250 |
Equity Oriented Fund
An investor must always be thoughtful and remember that their investment in balanced funds is not always protected from market movements and still bears a risk.
Balanced Fund Taxation Advantage
From the tax point of view, taxation policies are different for equity and debt funds. If an investor holds a balanced fund for fewer than 12 months, it shall be categorized under Short-term, and if exceeds to have for over 12 months, shall be classified under Long-term.
| Investment Avenues | < 1 Year | 1 to 3 Years | > 3 Years |
|---|---|---|---|
| Equity / Hybrid / Balanced | 15% | 10% (If gain is more than 1,00,000) | 10% (If gain is more than 1,00,000) |
| Debt | As per income slab | As per income slab | 20% (as pe indexation) |
As per the recent updates, the investment made in debt funds and held for more than three years in India will be categorized under the long-term and shall be levied capital gains tax percent cent with indexation benefit. Any earnings made from short term investment on debt investments would be added to the income and taxed as per the income tax slab under which the investor shall come.
The longer you hold to your balanced fund, the better is taxation benefit they provide
Recommended Articles
This has been a guide to what are balanced funds and its meaning. Here we discuss the suitability of Balanced Funds along with practical examples and its taxation advantages. You can learn more about from the following articles –
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