Balanced Mutual Funds - Best of Equity and Debt

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ONE category of mutual funds that a lot of investors miss out on is balanced funds. These funds have a mixture of both debt as well as equity in their portfolio and hence, have to be considered keeping this asset allocation position in mind.

 

Investors should check whether these funds are suitable for their needs and the impact on their overall portfolio before making their final decision. Here are some of the factors that will play a significant role in the entire decision-making process.

Nature of funds:

Balanced fund comprise those funds that have a mixture of both debt and equity instruments in their portfolio.

However, unlike a normal understanding of the term balanced, which means an equal balance between the two asset classes, the Indian scenario is such that balanced funds will have a minimum of 65 per cent of their assets in equity. This makes them slightly more equity oriented. The average equity component in the balanced funds category that is witnessed in the country is between 65 per cent and 80 per cent. The remaining part is made up by the debt holdings. This gives the funds a specific character and hence, these need to be taken into consideration while deciding on the funds.

Role in portfolio:

There are different roles for various holdings in the portfolio of an individual. When it comes to balanced funds, these are meant to ensure that a specific asset allocation mix that is sought by the individual is actually achieved. Usually when a specific asset allocation mix like say 70:30 is required, then the individual has to keep maintaining this mix by constantly rebalancing the portfolio. This worry disappears with the balanced funds because the fund manager constantly manages this kind of mix without the investor having to do much. The investor can meet their asset allocation requirements by looking at balanced funds as an alternative that will support them.

Care taken:

One of the biggest areas that investors would need to watch out for is the fact that the equity component is high in these funds so they behave more like equity funds rather than balanced funds. This can mean that the risk element in the investment does not go down while the investor could be under the illusion that they are reducing the risk. This becomes an important factor that needs to be considered before the fund is actually bought because nothing much can be done after the purchase is complete. The focus also has to be on selecting the right balanced fund because this will enable the portfolio to perform better. There are funds that have actually outperformed equity funds over a longer period of time as they rise strongly when the market rallies, but do not fall as much so that there is a net outperformance at the end of the day.

Benefits:

Investors should always look out for funds that will be managing their money in a manner that is actually suitable to their specific needs. So for some a slightly conservative approach might seem to be appropriate, while in case of others they might want an aggressive approach. Either of these can be achieved depending upon the manner in which the fund is actually selected.

The individual would want to ensure that their goals are achieved and the balanced fund could prove to be a route to go to that particular end. A good fund can also ensure that the investor takes a long-term view of the entire investment process, which is a good thing.

Happy Investing!!

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