Understanding the meaning of Balanced Fund to achieve maximum returns
For investors, the primary objective is to accrue optimum returns with minimal risk. The only tested and proven way to earn maximum returns with minimum risk is through diversification. You can choose from various Mutual Funds schemes segregated by asset classes and combinations, types of market capitalisation, themes, sectors, etc. One such fund is the Balanced Mutual Fund. Let us understand what is Balanced Mutual Fund and its role in portfolio diversification.
Balanced Fund is a Hybrid Mutual Fund that invests in pre-determined ratios of equity and debt securities. By investing in both securities, you benefit from capital appreciation through equities and a certain degree of risk mitigation through debt instruments.
Typically, fund managers allocate funds to equity and debt securities in pre-determined ratios. They may shift allocation between equities and debt up to a certain percentage. For example, if ABC Balance Fund allocates 60% in equities and 40% in debt, the fund manager has the option to go 10% over the pre-determined limit. When the stock market is not in your favour, the ratio could be 50%-50%, otherwise 70%-30%.
Balanced Funds are primarily categorised into two types:
Having explained what is Balanced Fund in Mutual Fund, here are its features:
Balanced funds invest across asset classes, i.e., equity, debt, and money market instruments, all in a single fund.
The equity market is highly volatile. When not in favour, it tends to decline at a rapid pace. Having a safe debt component adds a buffer to such volatility and reduces the portfolio's overall risk.
The asset allocation ratio is always specified; however, fund managers can shift the allocations to a specific limit when either asset class performs poorly.
Besides knowing the meaning of Balanced Fund, you should also be aware of its tax implications, which are as follows:
Balanced Funds are ideal for investors with a medium-risk appetite. They are an excellent addition to your portfolio. Indeed, they provide the best of both asset classes.
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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.