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Know more about Balance Funds,
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All of us have made choices at some point in time in our lives. By making a choice, we choose to select one alternative by giving up on the other one like deciding between a car which offers better mileage and the one that runs at a faster speed. The same is true when people have to make choices for their investments.

People invest in equities with intention of generating returns which are higher than any other available investment alternatives. While the primary objective of investment in any asset class should be to generate positive real returns or in simpler terms returns that beat inflation, the desire to get aggressive returns is what drives people to invest in equities. On the other hand, if one believes in taking lower risks then it is very likely that they will opt for debt-oriented investment option to have modest returns and regular income.

But could there be a way by which one can draw the maximum out of their investments and yet not take high risk. One way could be investing in equities and fixed income instruments individually and managing them regularly. This however is a tiresome task and requires constant monitoring which may not be possible for everyone. A more convenient & a sound approach would be to invest through a Balanced Fund.



How do you benefit from investing in balanced funds?
Balanced funds, as the name suggests, balance the risks and generates returns between a pure debt and a pure equity fund. These type of mutual funds buy a combination of equity stocks (usually over 65%) & long term and short-term bonds (remaining 35%) to provide both income and capital appreciation while avoiding excessive risk.

Returns from equity and debt have a low correlation which helps to provide a protection against any sharp downtrend in one asset class. Besides benefiting from a rise in prices of stocks that these funds hold, the debt portion of their portfolio also benefited from a favourable interest rate outlook as they invest in corporate and government bonds. Thereby the debt component lowers the portfolio risk by cushioning the higher volatility associated with pure equities. Thus balanced funds aim to achieve higher risk adjusted returns by diversifying with discipline.

In a situation where most investors end up choosing extreme investment options of either complete equities which expose investors to higher risk or completely into fixed income instruments, which means a compromise on returns, investing in a Balanced Fund certainly comes as a more judicious choice. Harnessing the tremendous return generating potential of equities and the risk reduction characteristic of fixed income investments, Balanced Funds not only provide Growth to the Invested Corpus but also render Stability to the investments made.

Why should I opt for Balanced Funds?
Diversification:
Spreading one’s investment across asset classes helps reduce market risks and moderate the effect of any individual asset class on the portfolio’s value without compromising on the returns to a large extent.
When an asset class enters a bearish phase, diversification helps limit the loss to the portfolio’s returns.
 
Balanced Risk-Return:
Balanced Fund falls between pure Equity scheme and pure Debt scheme, as it has small exposure to fixed income securities in the portfolio.
The Equity allocation aims to enhance overall returns of the portfolio while the investment in Debt instruments endeavours to limit the downside risk.
Thus a Balanced Fund seeks to provide a balanced risk–return mix to the investor.
 
Automatic rebalancing:
For an individual investor, managing separate Equity and Debt portions becomes a very tedious task.
The asset allocation in balanced funds is usually maintained strategically at a level.
To maintain a proper asset allocation, Fund Manager has to periodically review investment/securities & take buy, hold or sell decision and thus regaining the balance between asset classes.
 
Tax efficiency:
When securities are bought and sold in a fund, there is no tax liability at the investor's end which otherwise would have been the case had investor managed the allocation to debt and equity on her own.
However, since balanced funds usually maintain an equity allocation of more than 65%, investor's entire investment is treated as equity for tax purposes and thus investment holdings beyond 1 year becomes free from long-term capital gains tax$. Even dividends received are completely tax-free.
 
$ Kindly consult your tax advisor for actual tax implication before investment
 
In a nutshell, Balanced Funds tick all the requirements for a moderately conservative investor who wants to benefit from the equity markets at the same time does not want to give away the stability offered by fixed income. It represents a very sensible long term investment option that can give moderate capital appreciation along with steadiness to the portfolio.
 
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Mutual fund investments are subject to market risks, read all scheme related documents carefully.