KNOWLEDGE CENTRE Equity Mutual Funds / What Are Balanced/Hybrid Fund?
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What Are Balanced/Hybrid Fund?


What are balanced funds?

Balanced funds are the unsung heroes of stock markets. They are also known as Hybrid funds as they have a fixed mix of stocks and bonds. Balanced funds have a high or a moderate equity component. It is a mutual fund investment generally for people who are looking for low-risk income and decent capital appreciation.

Let us define balanced funds before moving on to its advantages.

What is a balanced fund?

A balanced fund gives your capital the exposure of both equity and debt instruments. It has both equity fund and debt funds in varying proportions. When combined, balanced funds have both low risks and high returns.

If you are an investor looking for avoiding unnecessary risks, then investing in balanced funds is the best option.

Let us take an example:

Let us assume you have Rs. 1,00,000 in your portfolio. The allocation is set at 75% stocks and 25% bonds. Hence, the allocation would be 75,000 is in stocks and 25,000 is in bonds. When invested, the stocks appreciated to 80000. The fund manager sells few stocks of Rs. 1250 and places them in bonds. Hence, Rs 78,750 (Rs 1,05,000 x 0.75 = 78,750) is in stocks and remaining in bonds.

The ratio is back on 75% stocks and 25% bonds that are Rs. 78,750 in stocks and Rs. 6250 in bonds. The method is carried out on a regular basis. When the asset class goes up, the funds are sold and others are bought. Hence, this structured investment brings in flexibility for those who want to invest for a long term.

What are the advantages of Balanced Funds?

Following are the advantages of balanced funds that makes them an attractive investment option:

  1. Helps in tackling inflation
  2. Gives tax benefits
  3. Balances the portfolio

Let’s understand each of this in detail:

  • Inflation
    As equities form a major part of the Balanced funds, it provides a good shield to battle which will erode your purchasing power in the later years.
  • Income Tax
    As per IT Law an individual is required to pay tax on debt instruments. However, balanced funds provide a unique proportion where 35% is invested in debt, however, there will be no tax on the returns earned on such products, unlike debt funds.
  • Asset Allocation and volatility
    The equity market goes through many swings as things are never certain in the stock exchange. However, an investor always invests in the equity funds that give the most profit. But when equities form a major part of your portfolio, Balanced funds rebalance them by selling few and adding debt products. This provides capital protection if equities fall in future

The balanced funds protect the investor’s money if one does not wish to have a separate debt and equity account. One can choose the style of investment when creating a portfolio.

How to choose a balanced fund to invest?

You should invest in monthly investment procedure for profitable returns rather than look for capital appreciation if the risk profile is low. The capital protection fund of the balanced fund is a close ended one. They aim at consistent returns and securing the money during unpredictable market conditions. The capital protection fund is suitable for people who do not want to risk their principal amount. They still enjoy the lock-in period and the benefits of investing in mutual funds.

For example, in 2003, the funds invested in government securities gave double digits like equity markets until 2004. After 2008, the stock market picked up after the early signs of recovery and debt did well. This happened after RBI cut the interest rates to revive the economy.

Balanced funds do well when the market is going through a difficult time as they have a debt cushion. Hence, they can withstand the shocks by the stock market. However, when the stock markets are rising, they might not do well as funds with 100% equity component.

The idea of investing in balanced funds is they give regular payouts. Hence, one must choose funds with consistent dividend record. Balanced funds can also be customized as per tax needs. All the types of investment have tax implications, but one can choose a fund that combines your investment goals with your tax needs. Investing in balanced funds can easily be done within minutes. Download the Angel Wealth app and discover a smarter way to invest and get rich!


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