What are Balanced Funds?
Balanced funds definition indicates the mutual funds that constitute a bond, a stock or often a money market component in an individual portfolio/asset class. However, balanced funds definition includes major diversification with a balance of debt and equity with a motive of income and growth that proposes the term ‘balanced funds’. Based on these segments, balanced funds provide a risk-reward balance higher than money market or bond funds and maximises returns on investment.
Features of balanced funds
- The balanced funds definition invests mainly in equity and debt in a specific ratio which reduces investor’s risk.
- It includes lower risks than complete funding in equity shares (briefly discussed under what is preference share) but does not guarantee returns. This explains the dividends cannot be trusted with regular income since they fluctuate with fund manager skills and market conditions.
- These funds allow 40-60% investment of the portfolio in equity and remaining in debt.
- These investment funds are a kind of hybrid fund popularly termed as asset allocation fund.
- This kind of mutual fund is used by investors (conservative or retired) who need a proportion of capital appreciation, income and safety.
- Balanced funds definition do not materially change their asset mix, unlike target date, life cycle etc which depends on the investor’s risk-return appetite.
| Category of Hybrid fund | Equity fund proportion | Debt fund proportion |
| Balanced hybrid fund | 40-60% | 40-60% |
| Aggressive hybrid fund | 65-80% | 20-25% |
| Dynamic asset allocation | No limit | No limit |
| Conservative hybrid fund | 10-25% | 75-90% |
| Equity savings fund | Minimum 65% but can be hedged along with derivatives | 10% minimum |
| Multi-asset allocation fund | At least 10% in every asset class(equity, debt, gold) | At least 10% in every asset class(equity, debt, gold) |
Types of Balanced Funds
Balanced funds definition has a classification of 2 categories:
Equity-oriented fund
Equity fund forms a part of the ones that invest majorly in equity shares and their derivatives. Equity fund allows aggressive capital appreciation, which results in a lesser focus on interest income through debt instruments.
Debt-oriented fund
it forms the vice versa part of the equity fund and here the schemes invest mainly in debt securities or debt-oriented balanced funds. This explains that it involves lesser risk which generates consistent returns for the long term.
Advantages of balanced funds
Reduction in risk
Complete investment in equity shares can be a risky step. An example of this can be quoted from the 2008 financial crisis when the NIFTY index declined from 6000 to 2500 levels, which made the equity investors incur major losses. As a result, in a hybrid fund structure, the debt-oriented balanced funds definition help to balance the equity fund risk.
Taxation benefits
Following this kind of investment scheme, the fund managers can migrate between equity and debt without having a tax liability on investors. However, if the investors move among the funds themselves, then taxation under capital gains subjects on them. The situation can result in taxation of 30% of investors in 36 months of investment in it who opt to move out from debt funds.
Investment portfolio diversification
Balanced funds definition works in case one wishes to diversify their investment portfolio. The option helps the investors to limit their liabilities by maximizing their returns and yet providing safety against the risks of the market.
Rebalancing funds
This point justifies that the balanced funds definition works when equity shares are overvalued as compared to debt and vice versa. Therefore, using hybrid funds investors can change or fluctuate with the two asset classes.
High returns
Since balanced funds definition consists of a mixture of equity and debt, it makes these funds less vulnerable to market volatility. Therefore, the debt components protect from volatility and equity funds in appreciation of capital which extracts high returns.
Protection from inflation
Consisting of debt assets in hybrid funds, it acts as an inflation hedge. However, if the proportion includes international bonds, they may protect investors from inflation by giving access to other countries. As a result, diversifying an investor’s portfolio becomes a shield from rising market prices.
This should be noted, that the balanced funds definition allows the investors to withdraw money periodically without asset allocation alteration. Therefore, it is termed as low investment schemes that can protect the investors from market risks and maximise returns on investment.
Mode of Investing in Balanced Funds
We can invest in balanced funds definition by following ways:
Online
If an investor wishes to avoid the expense of brokerage or commission, then there are online platforms for the investment available (a popular example can be Paisabazaar.com). Here the investor can compare and choose among 1700 funds in one place, rather than checking the website of each AMC (asset management company) and then selecting up. However, through online mode, the investor selects the fund, goes through the details and compares while using Lump Sum or SIP calculator, to calculate the investment future value.
Offline
If an investor is not confident of his knowledge, he might opt for a broker to invest. However, investment of funds via a broker focusses on regular plans with comparatively lower returns and varying expense ratios. Moreover, if an investor wants to invest independently, he must visit AMC nearest branch of the fund in which he invests. This further includes carrying the documents as follows:
- Cancelled cheque
- Identity proof
- Pan card
- KYC documents
- Passport size photos(4-5)
Who should invest in balanced funds?
- The investors to whom moderately high-risk appetite suits prefer these funds. This happens since fund managers keep a balance between the securities along with an option to switch investments from equity to debt and vice versa.
- The people looking for early retirement do choose these funds since it involves no lock-in period and less risk which justifies high liquidity.
- New investors consider balanced funds definition since they find an option for reasonable growth before stepping into the investment of aggressive mutual funds. Moreover, they offer bit security which some new investors wish to seek.
- The conservative investors meet financial goals since it ensures a balanced strategy that generates the best possible returns no matter what can be the market fluctuations and their impact on securities and bonds.
- Comparative to debt funds, the balanced funds definition only demands marginal risk with higher returns. Hence investors who can afford that risk choose balanced funds rather than debt funds.
- Preservation of capital as a target in the long term by the investors opt balanced funds that invest in high-rated bonds and large-cap stocks.
Items to be Considered while investing in balanced funds
- Firstly, an investor must keep in mind the objective of the investment before deciding to invest in balanced funds definition.
- The investor has to choose between equity or debt-oriented funds among whom to invest, thinking of the risk involved and returns that they provide.
- However, for a risk-averse type of investors, balanced funds definition which includes long-duration bonds and heavy investment in mid-caps may be less suitable.
- Moreover, investors are advised to compare funds based on careful study and past returns provided by them to find their consistent performance, noted especially during market fluctuations.
Money Market Fund
Money market funds are short term investing options (up to one year). This option selects when investors have less risk tolerance. The funds that provide them with good returns along it helps in maintaining a high level of liquidity. As a result, we will study the different types of money market fund along with the benefits provided.
Types of Money Market Funds
A money market is a place where the trade or exchange of cash and cash-equivalents occurs. The instruments traded in the money market have a maturity period varying from overnight to one year. So, let’s discuss a few money market instruments:
Commercial paper or CP
Commercial paper is a short term unsecured promissory note which is issued by the financial institutions and companies with high credit rating. The entities can diversify their short term borrowing sources. Commercial paper issues at a discount rate while redemption is a follow on face value. As a result, the difference is the earnings of an investor.
Certificate of deposit
A certificate of deposit is offered by scheduled commercial banks that do not hold an option of premature redemption. However, a certificate of deposit is freely negotiable while FD is not making it the only point of difference.
Treasury bills
Popularly known as T-Bills, the Government of India issues them for a period of up to 365 days. Since the government issues the t-bills, this instrument regards to be a safe option. Moreover, lower risks end with lower returns. As a result, the treasury bills have returns lower than other instruments.
Repos
It refers to a repurchase agreement that takes place between RBI and the bank to facilitate short term loans. Moreover, it can also take place between two banks.
Vanguard Balanced Funds
Vanguard balanced funds definition tracks the weighted average return of various indices for all underlying funds in which the person invests with proportion to strategic asset allocation, before counting expenses, tax and fees.
The Vanguard balanced funds definition works for medium-term investors horizon that seeks a balance between capital growth and income. Moreover, the funds target half allocation to growth asset classes while half to income asset classes.
Benefits of Vanguard Balanced funds
Low cost investing
The funds operate at low ongoing fees to minimize the costs of operating and managing the fund.
Competitive long term performance
Investors opting for the vanguard balanced funds get an efficient method to know how to capture long term performance in the market.
Diversification
Since the funds invest in a diversified portfolio of securities, it becomes less explosive to fluctuations in individual securities.