Balanced Fund is a type of mutual fund that invests a part of its assets in equities and a part in debt instruments. Balanced funds give the best of both the world, i.e. stability as well as scope for capital appreciation. These are the best investments for investors who want to benefit from stock market movements but fear the volatility.
Structure of balanced fund
Balanced fund typically invest in a combination of equities and debts and sometimes in money market instruments. These components serve the following purposes –
- Equities – Provide capital appreciation when the market goes up.
- Debt instruments – Provide regular income or capital appreciation, as applicable. It also helps protect capital when markets do not perform well.
- Money market instruments – Provide capital protection and liquidity.
For example, HDFC balanced fund (G) is one such balanced fund. Its objective is “To generate capital appreciation along with current income from a combined portfolio of equity & equity-related and debt & money market instruments”
Variants of balanced fund
We have defined the structure above but within debt and equities too, there are variants. For example, some balanced fund may put debt portion in company FD, company bonds, and debentures while some funds can invest their debt portion in Government securities.
Similarly, the equity portion can have various set of stocks based on the investment philosophy. For example, some funds can invest their equity portion in mid and small cap while some may invest in blue chip companies only. The idea is to provide certain return rate based on the objective of the fund.
Typically a balanced fund invests 50%-60% in equities and rest in debt. However, there are times when the equity portion may cross 60% if the fund manager anticipates capital appreciation.
Rationale behind investing in balanced fund
Balanced fund is the best way to manage your portfolio. Investors with medium risk appetite can invest in balanced fund as it automatically allocates some part in debt and some in equities. Debt funds miss the stock market Bull Run and pure equity funds may face bear for long time but balanced funds’ returns are relatively stable.
People who do not have high risk appetite can look for balanced fund for investment. There are many funds in the market which have performed much better than pure equity funds in last 2-3 years since the market crashed across the world.
Investors can clearly see that HDFC balanced fund has outperformed HDFC equity fund in last 3 years when the market crashed and showed extreme volatility.
Risks involved in balanced fund
Every investment comes with risks. Government securities too, even when called risk free, expose investors to interest rate and inflation risks. Naturally, balanced funds have their own set of risks.
First, balanced fund invest a part of the fund in equities. The return from this portion depends on how the market behaves. If the market is doing great, the returns will be higher. If the market slows down, the returns will slow down. Hence balanced funds expose investors to market risk.
Second, the debt portion of the fund exposes investors to the interest rate risks and inflation risks. If the interest rates are higher and inflation is accordingly higher, debt instruments depreciate in value causing debt portion of the fund to underperform.
Finally, mutual funds are best invested with systematic investment plan (SIP). SIP nullifies the impact of price fluctuations. SIP is the best option for investors with long term perspective.
The most profitable ways to make money is to invest when the market is at rock bottom but this is impossible to catch market at rock bottom. Hence SIP can be a good way to invest.