Question: I have heard a lot about balanced mutual funds. I was looking for them in the Scripbox list of recommended funds and I couldn’t find any. Why don’t you offer such funds to your investors?
Balanced Funds invest in both equity as well as fixed income instruments. The allocation between equity and fixed income is at the fund manager's discretion. They are called balanced or hybrid funds because they are like a sum of an equity fund and a debt fund.
Since the funds include both debt and equity components, it becomes impossible to evaluate their performance using objective criteria because they don't fall into either category. Each component's performance, also, is not known separately.
We believe that:
1. The allocation between equity and debt should be chosen based on your goals. Equity for long-term and debt for the short term.
2. You can then pick the best funds for equity and the best funds for debt separately effectively creating a balanced portfolio for yourself.
Some people recommend balanced funds because price fluctuation (NAV value) is lower. The steady returns of the debt component of the fund, dampen the equity fluctuations. This seems to make sense if you are focused on short-term changes in value rather than long-term wealth accumulation. Our recommendation to our investors is:
1. Invest in equities with your eyes open and with full awareness of the fact that prices would move up and down - a lot.
2. Always look at your total portfolio comprising both equity and debt investments. The total portfolio fluctuation, similar to balanced funds, would be much lower than just the equity funds.
So should you consider balanced funds for yourself?
Equity mutual funds are for the long term, debt mutual funds are for the short term (Read about the 4 kinds of money everyone has). The reasons for which you invest in either is different. What’s the point of balance when the goals are different?
Therefore, if you are clear about why you are choosing the mutual fund, then a balanced mutual fund simply isn’t needed.