Balance funds are the kind of mutual funds where the invested money is allocated in equity as well as debt. Usually, balanced funds invest minimum of 65% of the money in equity, while the rest are invested in debt. These funds are recommended for those who are looking for medium risk with an investment horizon of four years or more.
When you invest in balanced fund, it is advisable to enter when the market is on the downturn and valuations are low. You can withdraw the money when the market is on the upswing and the valuations are high. But this is not the way, most investors behave. With market sentiments dictating their decisions, they invest when the market is on the high. This is also because the media hype, advertisements and even existing investors urge people to invest when the markets are trading at high valuations.
It has been observed that 93 percent of portfolio returns is attributed to asset allocation. If you follow proper asset allocation strategy, then you need not be concerned about the uncertainties of the market. You may consult your financial advisor to undertake proper asset allocation based on your risk-taking ability, financial goals and tenure of investments.
Example of asset allocation
Let us assume that you are putting your money in a balanced fund which has 65% exposure in equity and 35% in debt. In a bullish market, equities tend to do well; so you will find that the overall weightage on equity goes up. Now, when you do a periodic review of your asset allocation, you should redeem some amount from equity and invest the same in debt, so that you maintain the 65-35 balance. What should you do when the market is at a low phase? In such a condition, you will see that the equity allocation won’t be at 65% due to negative returns from the market. So to maintain the original 65-35 asset allocation balance, redeem some part of your debt investments and invest it in equity. This follows the analogy of investing in equity when the markets are low.
The main objective for fund managers dealing with balanced funds is to use smart asset allocation to generate returns over medium to long-term. Fund managers review the asset allocation periodically and undertake portfolio rebalancing based on the investor’s original allocation on equity and debt.
In real life scenario, managing asset allocation is a little tough, especially when one does not have time to do rebalancing in a timely manner. So, it is better to invest in balanced funds where the fund managers can do the work for you.
Top Performing Balanced Funds
Over a period of 5 years, the top performing balanced funds have been Reliance Reg Savings Balanced Plan (12.69 percent), HDFC Balanced Fun (14.31 percent), HDFC Prudence Fund (10.77 percent), Tata Balanced Fund (15.04 percent) and Birla SL Balanced Fund (13.36 percent).
Since a minimum of 65% is invested in equity in a balanced fund, you can benefit from tax-free returns. If you redeem the amount invested, before one year from the date of investment, you have to pay 15 percent (and an additional applicable cess) tax on the profit. If you redeem after one year, you do not have to pay any tax on the profit earned. So, if your aim is wealth creation on a medium to long-term tenure through asset allocation, you can opt for balanced funds.