27th May 2024

Understand the features of balanced funds before investing


If you are looking for a mutual fund scheme that invests in both equity and debt, you can consider investing in balanced funds. Balanced funds invest in both equity and debt to help the scheme achieve a common investment objective. Although balanced funds invest in debt assets, they are known to offer better returns than both bond funds and money market funds. 

Balanced funds which are also referred to as hybrid funds have caught the attention of several investors because of their unique asset allocation strategy. Whether a balanced fund will invest majority of its asset in equity or debt may vary depending on the investment objective of the scheme. As of now there are 6 product categories under hybrid funds and depending on your investment objective, risk appetite and income needs you can decide which scheme to invest in.

If you are planning on diversifying your investment portfolio with balanced funds you need to understand the features of these funds. Here are some of them:

Reduce investor’s risk

As stated earlier balanced funds invest in both equity and debt. By diversifying your investment portfolio with both equity and debt balanced funds minimize the overall investment risk. A balanced portfolio is essential to glide over market volatility and balanced funds minimize an investor’s investment risk by investing in multiple asset classes.

Offer better capital appreciation

If you invest in an equity mutual fund you will investing in a scheme that predominantly invests in company stocks and other equity related instruments. Although equity funds have a risk rewards ratio, they are extremely volatile in nature. In case of balanced funds, the fund manager invests in both equity and debt. The debt portion of a balanced fund’s portfolio ensures that the scheme is able to tackle market volatility with ease. Even though balanced funds invest in equity, they offer decent capital appreciation while minimizing investment risk.

Offers rebalance

The fund manager has the liberty of switching between asset classes and allocating more money to the performing asset class. In case the equity markets are underperforming, the fund manager can hold on to the investments in equity and instead invest in debt. When the markets normalize, the fund manager can again invest in equity thus offer active risk management.

SIP investment option

You can either make a onetime lumpsum investment in balanced funds or opt for a monthly SIP option. Systematic Investment Plan (SIP) is an easy and convenient way of investing in balanced funds. All an investor has to do is decide on the monthly SIP sum and instruct their bank to allow auto debit. After this, every month on a fixed date the predetermined SIP sum is debited from the investor’s savings account and electronically transferred to the fund. You will be allotted units in quantum with the amount invested and in quantum with the fund’s existing NAV.

Target long term goals

Balanced funds might be volatile over the short term but over the long term they have offered far better returns than conservative schemes. If you have any long term goals that you haven’t yet decided how to achieve them, you can do so by investing in balanced funds. 

Balanced funds may hold the potential to offer to decent returns but do remember that returns are not guaranteed. This is why investors are expected to understand their appetite for risk before making an investment decision.