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What Are Balanced Funds? Why Invest In One?
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Most of the time it is a tedious task to make a choice between equity and debt funds for the investors. To solve this problem, professionals’ advice investors to keep their age and current market conditions in mind.
However, if you want to maintain diversification, which you can rebalance regularly, you can opt for balanced funds.
Balanced funds are a combination of equity and debt funds. Here the investors can enjoy the best of both worlds. But why should invest in the top balanced funds?
1) Best balanced mutual funds offer diversification. The fund manager takes care of the allocation and rebalances the assets as per the need. Such funds are ideal for investors who want the benefits of the stock market but cannot handle market volatility. All investors should have some portion of their investment towards balanced funds.
2) Balanced funds have shown a track record of rewarding customers with decent returns and stability. The returns may not be fascinating like equity related instruments, but they are ideal for conservative investors who are looking for long-term growth. They will prevent jolty rides and ensure a safe landing.
3) There have been scenarios of equity-oriented balanced funds outperforming equity funds as well. This is despite equity-oriented balanced funds maintaining 30 to 35 per cent allocation towards debt funds. The reason behind the growth is the fund manager predominantly focusing on the equity market and a signification mid-cap, small-cap exposure.
Do you there is a balanced fund for every investor?
1) Debt-oriented fund: Such funds include aggressive, moderate, and conservative funds. Their exposure levels towards equity and debt are different. Vigorous and moderate hybrid funds share 30 per cent equity exposure while traditional funds have 10 per cent or less equity exposure. You are guaranteed to receive long-term profit with a hold of three years.
2) Equity-oriented funds: The focus is primarily on equities here and is highly volatile. It is better to expose 65 per cent of balanced funds to equities to gain better tax benefits and capital appreciation. Balanced funds generally comprise 50 per cent of the equity and equity-related instruments. The remaining are invested in debt instruments. If you manage the equity-oriented balanced funds well, the returns are tax-free.
3) Arbitrage funds: Arbitrage funds make the most of market fluctuations by investing 65 per cent of their assets in equity and equity-related instruments. These funds earn profit by purchasing and selling securities on different stock exchanges.
4) Asset allocation funds: This funds exposure towards debt and equities keep varying. Most of the funds here are from the funds' scheme itself.
What are the benefits of balanced funds?
1) Tax efficiency: Balanced funds’ manager juggles between equity and debt. They do not incur any tax liability for investors in this process
2) Rebalancing: Sometimes equity markets are overvalued compared to debt markets and vice versa. In such scenarios, fund managers should have the liberty to switch between two asset classes
3) Risk reduction: Equity markets are highly risky. If the situation is extreme, the market can decline by a huge magnitude. On the other hand, debt markets are less dangerous because they offer fixed returns
Swarali Chavan is an investment banker by profession. She has spent considerable time researching on best balanced mutual funds. She has explained why one should invest in them
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