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Things To Consider Before Investing In Best Balanced Mutual Funds
Hybrid Funds/Balanced Funds are the combination of equity and debt in a single mutual fund portfolio. Equity and debt funds are the two extremes and most prominent in the investment spectrum.
It is usually tougher to find the perfect balance or the right proportion to invest in equity and debt funds. This is where balanced funds come into play. The balance funds are a mid-way solution where equity and debt are combined either in pre-determined proportions or in dynamic proportions based on the market conditions and offer the blend as a readymade product for the investors.
Substantially, balanced funds are all about getting the best mix of stability from debt funds and wealth creation possibilities of equity funds. The best balanced funds are those which layout the asset mix based on the undertone of the market.
Here is what you should necessarily consider before investing in balanced funds:
Check the past performance of the fund over a period of 3 years and 5 years but make sure to compare them with the right peer group. Occasional under performance is acceptable but consistent under performance of a balanced fund makes it unsuitable to be in your investment portfolio.
Check the risk involved with both equity and debt components of the balanced fund. You don’t want too much exposure to non-movers and must avoid the risk of small caps. You would like to avoid the debt funds with too much downfall in the credit risk curve. Also, avoid funds with higher lock-in or tenure. These facts will be available in the fact sheet of the balanced fund.
Give priority to the balanced fund which has shown consistent performance in terms of returns and investment strategy. An aggressive balanced fund where the mix of equity and debt keeps varying is also not a good idea. To get better and stable returns, you need a well researched and planned strategy and consistency of implementing the strategy.
Equity funds tend to be risky, especially the mid-caps and small-cap funds. They do have given alpha in the past but their market volatility makes them riskier. A balanced fund must also have a balance between the equity components.
Similarly, with the debt funds as well you must not be exposed to lower-rated bonds even if they promise higher returns as they carry high default risk. Hence, the debt component in the balanced fund must also balance your risk.
Lastly, you need to make sure that the individual mix of equity and debt in your mutual fund is in sync with your overall financial plan. You cannot have more exposure to either equity or debt. The fund must maintain your risk-bearing capacity along with the returns you desire to achieve in a certain period of time.
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