Balanced Mutual Funds

How Do Balanced Mutual Funds Work?

In a balanced mutual fund, the aim of the equity fund is largely focused on generating high capital rewards by stock market investments. On the other hand, the bond values offer a sense of security in case the stock prices fall.

Through a balanced mutual fund, an investor ideally divides his investment in a mix of stock and bonds. The investor might go for a 60-40 or a 70-30 mix, or a 50-50 or a 40-60 mix. Thus, based on the proportion of investment in the asset class, a balanced mutual fund could either be equity-oriented or debt-oriented.

It is important to note that this is just a single investment made by an investor that gets divided into stocks and bonds. The nature of this division is decided by the fund manager. To know about our funds select report, click here

Advantages of Balanced Mutual Funds

• Lower-Risk Investment: Balanced mutual funds carry a comparatively lower level of risk as compared to other investment options as it provides a diversified option to channel your investments.
• Less Expensive than buying stocks and bonds: Since balanced mutual funds are a mixture of both stocks and bonds in a single portfolio, it proves to be comparatively less expensive an investment as compared to buying both stocks and funds separately.
• Expert Management: Investors often get confused when it comes to choosing from a plethora of stocks or bond options available in the market. However, since all the decisions of building the balanced mutual fund portfolio are done by the fund managers, it provides a considerable advantage to first-time investors or those who have very limited knowledge or understanding of the stock market.

Things to Consider Before Investing in a Balanced Mutual Fund

1. No Customisation Option Available: Although balanced mutual funds provide fewer risks as compared to other investment options, it is not entirely risk-free. A major disadvantage is that the decision to diversify the funds is entirely in the hands of the fund manager. Hence, these mutual funds cannot be customised according to individual preferences. You cannot decide which stock or bond to invest in or re-allocate your investments among these
2. Tax Implications: Investments in balanced mutual funds, be it for short-term or long-term, do not come under any tax exemptions. You will continue to pay tax on the amount invested as well as the returns.

Who Should Invest in Balanced Mutual Funds?

If you are a newbie looking for a low-risk investment option, then balanced mutual funds is an option you could consider. Since these funds are managed by experts, investors who are just testing the waters in mutual fund investments could go for these funds. One can earn good returns if the duration of these mutual funds is extended for the long-term. As a result, youngsters who have just started their career or people who are planning to save for their retirement are the ideal candidates for investing in a balanced mutual fund.

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Mutual Funds

Mutual funds are the distribution of funds made by several investors in a variety of securities with an objective to gain superior returns. This is done with the help of a skilled fund manager. The function of the fund manager is to aggregate the investments made by many small and big investors.  Once these funds are pooled in, they are distributed appropriately by the fund manager to various financial securities that have a potential of generating high returns. These returns would then be distributed among the investors by the fund manager, resulting in a profit.

Simply put, here are the 4 simple steps involved when an investor invests in mutual funds:

1. Several investors pool in their money
2. A fund manager invests this pooled money in various securities like stocks, bonds, money market instruments, etc.
3. These securities generate returns (although, there are chances of a downside as well)
4. These returns are then distributed to the investors (primarily in the form of an eventual increase in net asset value of the mutual fund scheme)

Types of Mutual Funds

Mutual funds are a good investment avenue owing to their vast investment horizon. There are several types of mutual funds based on an investor’s need and appetite for risk. Some of the many types of mutual funds include:

Money Market Funds

Money Market Mutual Fund  is a mutual fund that invests in highly liquid and safe money market instruments so as to achieve a short-term income in cash or any cash equivalent. Fund managers collect the pool of funds invested by the investors and invest them in money market instruments such as Treasury Bills (T-Bills), Repurchase Agreements (Repos), Commercial Papers, and Certificate of Deposits (CODs). This investment is ideal for investors with a short-term investment horizon who aim to get low but safe returns that are highly liquid, within a short span of time that varies from a few days to a couple of months.

Income (Debt) Funds

Income Funds are funds that invest in government and high-quality corporate debt that hold bonds which can be reaped by an investor at regular intervals (monthly, quarterly, half-yearly or yearly). This investment is ideal for investors who are risk-averse and have a long-term investment horizon who aim to get a low but steady income. This investment is not ideal for investors who are tax-conscious as regular income is taxable.

Equity Funds

Equity Funds are a popular type of mutual funds that invest primarily in stocks. A fund manager aggregates the pool of funds invested by the investors in a variety of stocks that could be solely on those with large market capitalisation or a mixture of small and medium market capitalisation. This investment is ideal for budding investors who wish to expose themselves to the stock market with an aim to gain steady returns over a long period (say, at least 5 years).

Balanced Funds

Balanced Funds invest in stocks and government bonds so as to achieve a regular income. The concept behind balanced funds lies in the inversely proportional relationship between stocks and bonds – stocks can give good returns but carry higher risk while bonds give lower returns while carrying lower risk – a hybrid of these two hence generates returns while limiting the downside. This is ideal for investors that have a long-term investment horizon who aim to gain steady returns with low financial risk owing to the ‘balanced’ distribution of funds.

Tax-Saving Funds

Tax-saving funds, as the name suggests, are funds that allow an investor to save on taxes on your current income as per section 80C of the Income Tax Act that allow a tax rebate of up to INR 1,50,000 on the amount invested. Equity Linked Savings Scheme (ELSS) are the only ones currently that offer tax exemption on the invested amount. These funds invest primarily in the equity market and have a lock-in period of three years. These funds are ideal for investors who wish to get tax deductions on their current income while also seeking wealth creation.

Benefits Of Investing In Mutual Funds

Simple And Easy To Understand

Mutual fund investments involve a very simple and hassle-free investment procedure. The concept is relatively easier to understand compared to other investment options. This makes it a popular investment choice for individuals with no significant financial prowess.

Invest in Small Amounts through SIPs

One of the greatest benefits of mutual fund investments is that one can start with a relatively small amount. There is no upper or lower investment limit. If you are a novice then this would be ideal for you as you might want to start with a small investment through systematic investment plans. As you gain investment skills, you can increase the amounts.

Wide Application and Usage

Simplicity is not the only benefit of mutual funds. This form of investment is also versatile as it is used by both—experts as well as beginners. Investors will be able to get short-term or long-term savings, automatic credit, systematic withdrawal, dividends out of mutual fund investments.

Thus, investing in mutual funds can prove to be a safe option for any investor who wants to start small with an aim to earn attractive returns. Mutual fund investments are also convenient as they can now be done online. Learn more!