Why a balanced fund?
Balanced funds are equity-oriented funds which invest in both equity and fixed income instruments. They are designed for the long haul rather than making a quick buck. The asset allocation of this fund to equity is 65 percent whereas the remaining is invested in debt securities. The scheme allows you to buy a single mutual fund which yields growth and income at the same time and provides diversification as your money isn’t tied down to a single type of investment. If you are a first-time investor with a low risk-appetite or you are vulnerable to the ups and downs of the economy a balanced fund could come to your rescue. If you look forward to investing via SIPs balance funds are more suitable for investors who look to invest smaller portions of their monthly income. Balance funds also help you diversify especially if you do not have the time to monitor stocks. They are ideal if you are looking for a retirement fund which helps you outdo inflation or you want to generate an income which supplements your current needs.
Balanced funds are also tax efficient, so any scheme which typically invests more than 65 percent of its allocation in stocks is treated as an equity fund when it comes to taxation. Here the debt portion is taxed like equity. In a debt fund, short-term capital gains are added to the income and taxed as per the person’s tax slab while the long-term gains are taxed at 20 percent with indexation. The only downside is the fund manager controls the asset allocation which might not always match with your asset allocation or goals. Sometimes returns can also be dragged down by large cash allocation as fund managers sometimes take the leeway to change the allocation between stocks and bonds as they see fit.