Warren Buffet once said, "Only when the tide goes out, you discover who has been swimming naked." What he meant was that investors should not judge fund managers based on their success in a bull market alone. The best fund managers are the ones who continue to stand even when things around them are all falling apart.

A balanced fund combines a stock component, a bond component and sometimes a money market component in a single portfolio. Generally, these hybrid funds stick to a relatively fixed mix of stocks and bonds that reflect either a moderate, or higher equity, component, or conservative, or higher fixed-income, component orientation.

Younger investors should invest in balanced funds after thoroughly understanding their risks while seniors seeking a regular income should switch to debt funds from balanced funds. Most balanced funds have high equity exposure ; they need to invest a minimum 65% in stocks to avail of the taxation benefits of equity funds. The debt portion in balanced funds reduces the risk a bit, but it is still high. So, balanced funds are meant for the long-term (5-year plus) and not short to medium term. Since the purpose of getting into balanced funds is to reduce risk, investors should go with large-cap oriented balanced funds and avoid schemes with excessive exposure to midcaps.

Let us first understand how balanced funds are different; following funds will further elaborate specific characteristics of these funds –

How do Balanced Funds work?

Balanced funds help you to ride the equity wave while still maintaining a low-risk profile. They invest the fund’s assets in equity shares as well as debt instruments in a specific ratio according to the investment mandate of the fund. The main objective behind such asset allocation is to enjoy the benefits of diversification. Instead of risking all your money in equity, balanced funds help you invest prudently with lower risk.

A balanced fund can be equity-oriented or debt-oriented. An equity-oriented balanced fund invests at least 65% of its assets in equities. The rest of the fund’s corpus is invested primarily in debt, or at times some portion of it is held in cash. On the contrary, a debt-oriented balanced fund invests at least 65% of its assets in debt and money market instruments. The rest of the fund’s corpus is invested primarily in equities.

Who should invest in Balanced Funds?

Usually, other mutual funds like equity funds change their asset allocation according to the changing economic conditions. However, balanced funds strictly behave in line with their orientation. These funds don’t go beyond the 65% limit as prescribed in the investment mandate.

Balanced funds are meant for investors who require a fusion of income, safety, and moderate capital appreciation. During the bull runs, the fund is able to generate higher returns due to the equity component. However, during the bear runs, the debt component provides a cushion to prevent erosion of fund returns.

Things an investor should consider before investing in balanced funds –

• Balanced funds are not completely risk-free. The equity component of the balanced fund makes the fund vulnerable to market risks.
• Equity-oriented balanced funds have been found to deliver average returns in the range of 10%-12%. In spite of having the debt component in its portfolio, balanced funds do not offer guaranteed returns.
• Balanced funds charge an annual fee for managing your portfolio, which is known as the expense ratio.
• Balanced funds may be ideal for conservative investors who are ready to invest their savings in traditional avenues such as 5-year bank fixed deposits (FDs).
• Balanced funds may be used for meeting intermediate financial goals which can be achieved over a period of 5-7 years.
• The capital gains on balanced funds are taxed based on the orientation of the fund. Equity-oriented balanced funds are taxed just like pure equity.

In 2017, the favorite investment category of investors was balanced funds. Seasoned investors and younger people entering into equity markets for the first time have bet on these funds. Many elderly investors were promised a regular dividend income with the mis-selling of these funds. All these investors need to prepare for more turbulent times in this category in 2018 and 2019.

Balanced funds, which are also known as equity oriented hybrid funds, can get both equity and debt exposure with a limited amount of money and thus they are recommended for young as well as first time entrants in the market. These funds are also suitable for seasoned investors who don’t want to do the task of managing their asset allocation and rebalancing themselves.

It is mandatory for the investors to check their investment horizon and risk appetite before they invest in these funds. They should be bought with an investment horizon of at least five years because they are predominantly equity oriented and will be only slightly less volatile than pure equity funds. It is recommended that investors should not pull out the money already invested in these funds. People should accept that they have been mis-sold if they have invested in them with the objective of earning a regular income. These funds will have to stop eventually if the market downturn continues.

Founded in 2005 by new–age entrepreneur Abhishek Bansal, the Abans Group has evolved into a globally diversified conglomerate, providing expertise in Broking Services, Non-Banking Financial Dealings, Financial Services, Agri-Commodity Services, Warehousing, Realty & Infrastructure, Gold Dore Refinery & Manufacturing, Trading in Metal Products, Pharmaceuticals, Software Development & Wealth Management. The Group is a comprehensive financial and non-financial services and solutions provider, aiming to provide end-to-end solutions to its clients.