What Is a Balanced Mutual Fund?
Balanced mutual funds or hybrid mutual funds are investments that seek to achieve capital growth and income by investing in a mix of stocks and bonds. The idea behind these funds is that they give investors both risk reduction and growth.
It typically has lower risk and volatility than equity funds, making them a good choice for investors who want to diversify their portfolios.
Balanced Fund vs. Equity Fund
The main difference between a balanced and an equity fund is that the former invests in stocks and bonds while the latter only invests in stocks. Balanced funds tend to be more diversified and have less risk, but they also have lower potential returns than equity funds.
While stock and bond prices may go up or down in value, they tend to move in opposite directions. This means that when one asset class is down, the other may be up, which can help offset some losses.
Features of Balanced Mutual Funds
The following are the features of balanced mutual funds:
- They are a type of investment fund that seeks to achieve both capital growth and income by investing in a mix of stocks and bonds.
- Balanced mutual funds typically have lower risk and volatility and invest in debt and equity securities in a balanced ratio, reducing risk exposure for investors.
- Hybrid fund investments allow the fund manager to modify the fund's portfolio in response to market conditions.
- Pure stock mutual funds are riskier than balanced mutual funds.
- In the case of substantial market swings, these mutual funds are designed to automatically rebalance an investor's portfolio. Fund managers can sell stock mutual funds to sustain the fund's success and vice versa.
Types of Balanced Mutual Funds
There are two types of balanced mutual funds: equity-oriented balanced funds and debt-oriented balanced funds.
Equity-Oriented Balanced Funds
Equity-oriented balanced funds invest more in stocks than bonds. These funds are typically more volatile than debt-oriented balanced funds, but they also have the potential to generate higher returns over the long term.
Debt-oriented balanced funds
Debt-oriented balanced funds invest more in bonds than stocks. These types of funds tend to be less volatile than equity-oriented balanced funds, but they also have the potential to generate lower returns over the long term.
Advantages of Balanced Mutual Funds
The following are the advantages of balanced mutual funds:
- Offers Diversification: Balanced mutual funds invest in a mix of stocks and bonds, which helps diversify an investor's portfolio.
- Potentially Generates Income and Capital Growth: Balanced mutual funds seek to achieve capital growth and income by investing in a mix of stocks and bonds.
- Less Volatile Than Pure Stock Mutual Funds: Balanced mutual funds typically have lower risk and volatility than pure stock mutual funds.
- Automatically Rebalances an Investor’s Portfolio: In the case of substantial market swings, balanced mutual funds are designed to automatically rebalance an investor's portfolio.
Tax Rules
Dividends paid by any mutual fund are now included in your total income and taxed at your marginal tax rate. The fund's equity exposure determines the tax rate on capital gains given by hybrid funds.
For short-term capital gains (gains realized on selling equity fund units within one year of purchase), units of non-equity funds are taxed at the assessee's standard rates.
In contrast, units of equity funds are taxed 15% on redemption of units, whereas STT is payable on redemption.
For long-term capital gains (gains realized on redeeming debt fund units for more than one year), units of non-equity funds are taxed at 20% with indexation, while units of equity funds are taxed at 10%.
Consideration Before Investing
The following are things to consider before investing in balanced mutual funds:
- Investment Cost: Balanced mutual funds typically have higher expense ratios than pure stock or bond funds.
- Risk Tolerance: Balanced mutual funds tend to be less volatile than pure stock funds, but they are still subject to market risk.
- Financial Goals: Balanced mutual funds can help investors achieve capital growth and income.
- Peak Performance: Balanced mutual funds may not outperform pure stock or bond funds in a bull market, but they are less likely to lose money in a bear market.
The Bottom Line
Balanced mutual funds are a type of investment fund that invests in a mix of stocks and bonds. These funds offer the diversification, the potential for income and capital growth, and can automatically rebalance an investor's portfolio.
These funds typically have higher expense ratios than pure stock or bond funds and are subject to market risk.
When deciding if balanced mutual funds suit you, consider your investment cost, risk tolerance, and financial goals.
FAQs
1) What is a Balanced Mutual Fund?
A Balanced Mutual Fund is an investment fund that invests in a mix of stocks and bonds. These funds offer diversification, the potential for income and capital growth, and can automatically rebalance an investor's portfolio.
2) What are the two types of Balanced Mutual Funds?
There are two types of Balanced Mutual Funds: equity-oriented and debt-oriented. Equity-oriented Balanced Mutual Funds invest more in stocks than bonds, while Debt-oriented Balanced Mutual Funds invest more in bonds than stocks.
3) What are the benefits of investing in Balanced Mutual Funds?
The main benefits of investing in Balanced Mutual Funds are that they offer the diversification, the potential for income and capital growth, and can automatically rebalance an investor's portfolio.
4) What are the risks of investing in Balanced Mutual Funds?
The principal risks of investing in Balanced Mutual Funds are that they have higher expense ratios than pure stock or bond funds and are subject to market risk.
5) What should I consider before investing in Balanced Mutual Funds?
Before investing in Balanced Mutual Funds, you should consider your investment cost, risk tolerance, and financial goals.
