Finding the Balance

Finding the Balance

Balanced Mutual funds such as the popular Balanced Advantage Fund are financial instruments which invest in a mixture of both debt and equity segments in specific ratios. Sometimes they are also referred to as hybrid funds since these balanced funds enable investors to diversify their mutual fund portfolio. As they maintain a balance between both debt and equity segments, they provide the best risk-reward ratio at that specific instance in the market and help to maximise the return on investment. Balanced mutual fund, have a variable mixture of allocations that starts; anywhere above 65 per cent in equity going all the way up to almost 80 per cent.

There are two components in this type of balanced mutual fund. The equity portion of this investment provides protection against the erosion of investor’s purchasing power. Mostly, the equity holding portion of this mutual fund is in large, dividend-paying companies ( Largecaps stocks ). To balance out the risks of equity mutual funds, the balanced mutual funds invests the remaining of it’s corpus into debt oriented schemes.

The debt segment of the balanced mutual fund scheme mostly involves investing in company bonds, government bonds and other debt securities. Historically this debt fund portion provides low returns compared to equity funds, however it helps to serve two purposes. Firstly, they create an income stream. Secondly, this debt investment helps to minimize the market volatility of the investor’s mutual fund portfolio.

During a bull market, balanced funds generate higher returns from the equity component. In a bear market, the erosion of fund returns is also prevented due to its debt component. There are times when the equity market is overvalued in comparison to the debt market and vice versa. In this case, with balanced funds, fund managers can move between the two asset classes i.e. Equity instruments and Debt instruments. Typically, this fund is the best option for investors with a low risk tolerance who are looking for mutual fund investment options that make up for outpacing inflation; and also generate income that helps to supplement investor’s financial needs.

Investors in balanced funds should note that these mutual funds are not designed to outperform the broad equity fund categories. These mutual funds have been designed to check their downside risks due to their mix of equity-debt tactical asset allocation.

The categories of balanced mutual funds specify different proportions of equity and debt.

Balanced/Hybrid Fund CategoryEquity PercentageDebt Percentage
Aggressive Hybrid Fund65 to 80%20 to 35%
Balanced Hybrid Fund40 to 60%40 to 60%
Conservative Hybrid Fund10 to 25%75 to 90%
Dynamic Asset Allocation Fund / Balanced Advantage FundNo LimitNo Limit
Multi-Asset Allocation FundAt least 10% in each asset class such as  (equity, debt, gold)At least 10% in each asset class such as (equity, debt, gold)
Equity Savings Fund65% minimum but can be hedged with derivatives10% minimum

The biggest advantage of investing in the balanced advantage mutual fund is that they try to ensure capital appreciation, provide a safety net against potential risks and since a portion of balanced mutual funds consists of debt assets, they can also act as an inflationary hedge.

Balanced mutual funds also allow investors to withdraw money from the funds periodically without any alteration to asset allocation. Hence, these balanced mutual funds are low cost investment schemes that can maximise the returns on investment while protecting investors against risks.

The information, analysis and opinions expressed herein are for educational purposes only and are not intended to provide specific advice or recommendations for types of balanced mutual fund schemes. This material is not an offer, solicitation or recommendation to purchase any financial products or services or mutual funds. Always remember that all investments, including balanced advantage fund investments carry some level of risk, including the potential loss of principal invested.