When we invest money, we all look for options that aren’t too extreme when it comes to risks and gives reasonable returns as well. If you are one such investor, then you might consider investing in balanced mutual funds. But why should one invest in balanced funds? How is it different from other types of investment. This article aims to answer these questions.

What are Balanced funds?

As the name suggests, balanced funds are a healthy mix of equity and debt. In 2018, as per the SEBI, balanced mutual funds are reclassified into three categories, namely aggressive allocation funds, conservative allocation funds, and arbitrage funds.

Investing in mutual funds that are balanced gives an added advantage- generally, the investor decides the allocation between debt and equity, but in case of balanced funds, you have an expert fund manager who does that for you.

So when it comes to hybrid funds, you have a choice whether to leave the asset allocation with a fund manager or do it on your own. When you look at finances from an objective point of view, it is always a good idea to do your asset allocation based on your personal requirements and preferences. So it is a wise thing to have a basic knowledge and understanding about balanced mutual funds as an asset class. Here are the advantages –

  • Tax benefits – The tax benefits you receive on Aggressive Allocation funds is the biggest advantage for you as an investor. At the moment, a balanced fund with 65% exposure to equity is defined as an equity fund for the purpose of taxation. In this scenario, the STCG is taxed at 15%, whereas the LTCG is taxed at 10% above Rs.1 lakh per year of gains. To define LTCG, the cut off period is 1 year.
  • Restructuring portfolio – Balanced mutual fund investment can be very helpful in restructuring your portfolio. For instance, if the original equity/debt mix was 60:40, and if the equity has increased greatly due to the market, and you can re-work it with Conservative funds. This is how you can do asset reallocation.
  • Transparency – The equity and debt portfolio is always available to you in the form of fact sheets on a monthly basis. This gives a certain level of transparency and credibility when you invest in mutual funds that are hybrid. You can then use these fact sheets for evaluation and make your own informed decision.
  • Low risk – Balanced funds such as arbitrage funds are appealing because they can offer low risk such as debt with tax benefits of equity. This is a great advantage.

So these are the reasons why investing in mutual funds that are balanced or hybrid is a good idea. Study balanced funds and make your informed decision based on the advantages. You can always take the services of an expert who can help you with investments in hybrid funds. Happy investing!

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