ATM :: Balanced funds, right way to invest

Prashant Mahesh, ET Bureau | May 12, 2016, 06.45AM IST | Economic Times


Timing the market or deciding how much to allocate to debt or equity at any point of time is a difficult decision for most investors to make. Investors not willing to invest in a basket of products, could choose balanced funds which automatically rebalances your portfolio .

1. What are balanced funds?

Balanced funds, as the name suggests, are hybrid funds which typically invest in equities and debt instruments. There could be equity oriented as well as debt oriented hybrid plans.

Typically, equity-oriented balanced funds have a 65%-75% exposure to equities with the balanced 25-35% being invested in debt-oriented instruments. Many financial planners suggest firsttime investors into mutual funds begin their journey by investing in balanced funds.

2. What is the advantage of investing in a balanced fund?

Balanced funds offer benefits of asset allocation model in a single structure. The equity component seeks to deliver long-term returns, while the debt component provides stability to the portfolio.

This diversification limits the portfolio from downside risks if either equity or debt enters a bearish phase. When the markets are high, the fund manager has to compulsory sell equity to maintain the maximum level and likewise when the markets are low, the fund manager has to buy equities to maintain the minimum level of equity investment. This is a regular process which a retail investor can’t do because of lack of knowledge and expertise.

3. What taxation benefits do equity oriented balanced fund investors enjoy?

Since balanced funds have an average exposure of 65% to equities, they are taxed as equity funds. These funds enjoy tax-free returns if the holding period is greater than a year; otherwise, they are subject to short-term capital gains tax. Many investors opt for the dividend option in such schemes, as the dividends are tax-free (without any dividend distribution tax) in the hands of the investor.

After the new tax laws where debt funds are taxed as short if held for less than 36 months, the balanced fund is one option where the entire debt holding is tax free if the fund is held for more than one year. If you invest in debt funds of mutual funds, you get advantage of long term capital gains taxation with indexation only after three years.


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