Balanced funds are a new category of hybrid funds that came into existence after the recategorisation of mutual fund schemes by Sebi in 2017. Until then, mutual fund participants – be it fund managers, advisors or investors – used to refer to equity-oriented hybrid funds or what is now known as aggressive hybrid funds as balanced funds.
As per Sebi investment mandate, a balanced fund has the option of investing 40-60% of its corpus in equity, and 40-60% in debt. These schemes are not allowed to invest in arbitrage opportunities.
So, what is a balanced scheme? As you can see, they have the freedom to invest in both equity and debt. For example, if the fund manager is bullish on equity, she has the option to invest 60% in stocks and 40% in debt. If she is bearish on stocks, she can invest 40% or 50% in stocks, and the rest in debt.
Since the fund manager has the freedom to shift to between equity and debt based on her outlook, she would also book profits periodically to realign the portfolio. This will help make extra returns over a long period.
The mixed portfolio of equity and debt makes these schemes relatively safer than pure equity funds that invest most of their corpus in stocks. The debt part of the portfolio offers stability while the equity would help investors to earn a little extra returns from these schemes.
Conservative investors looking to earn a little extra over debt funds may consider investing in these schemes. However, they should be mindful of the fact that the equity exposure in these schemes make them riskier than pure debt schemes. Such inventors can invest in these schemes with an investment horizon of at least five years.
Note, balanced funds are taxed like a debt fund. If you sell your investments in these schemes before three years, the returns would be added to your income and taxed as per the income tax slab applicable to you. If you sell your investments in them after three years, returns would be treated as long-term capital gains and taxed at 20% after indexation benefits (adjusting tax payments by employing a price index that factors in inflation).
Finally, as always, make sure that your risk profile and investment objectives are in line with the balanced fund category before investing. If you are unsure, seek the help of a mutual fund advisor before investing.