What are Balanced Funds?
Prior to SEBI’s categorization of Mutual Funds, Balanced Hybrid Funds were vaguely defined and invested between 65% to 80% in equity and between 20% to 35% in debt, this was a little confusing to investors as the name “balanced” would suggest that they invest equally in debt and equity. Therefore according to the new SEBI categorization of Mutual Funds balanced funds need to invest between 40% to 60% in debt and between 40% to 60% in debt and funds that invest 65% to 80% in equity and between 20% to 35% in debt are now called Aggressive Hybrid Funds. A fund house is allowed to offer only one Balanced Hybrid Fund to investors and it cannot offer both a Balanced Hybrid Fund and an Aggressive Hybrid Fund. Balanced Hybrid Funds are suitable for investors with a moderate tolerance for risk and investment horizons of at least 3 years.
As balanced funds never have more than 65% of their assets in equity, they are considered debt funds for the purpose of taxation. Therefore, if investments in these funds are held for less than 3 years returns will be taxed according to the investor’s tax slab. If the investment duration is more than 3 years returns will be taxed at 20% after indexation.
Features of Balanced Funds-
Lower Expense Ratio:
These funds tend to have very low expenses (and therefore, expense ratio) as fund managers don't change investments very often after investing once. This is because an optimal ratio of risk and safety has already been achieved, unless there are major movements in the market.
These funds are highly diversified not only in terms of asset classes, of which at least 3 are used, but also sectors of investment. This helps the fund manager bring down the risk normally associated with equity funds, while not making major compromises on returns.
Low to moderate risk associated:
The goal of this type of a fund is to minimise risk, and therefore this option is extremely popular with new or budding investors.
Provide regular income:
Retirees can choose this option to take advantage of regular dividends that are given out from the debt side of the fund. This makes them a good option for those looking for moderate returns with moderate capital appreciation.