Financial experts always recommend portfolio diversification by investing across various asset classes and securities. Diversification aids in mitigating risk, however, investing heavily in low-yield or risky instruments is not advisable. Balanced funds aim to invest in the most suitable instruments without increasing your risk too much. Though equity funds are popular among investors, it is important you consider your financial goals and risk appetite before investing. In this article, we will see a comparison of Balanced funds vs Equity funds.
What are Balanced Funds?
Balanced funds are also known as hybrid funds. These financial instruments invest in both debt and equity segments in specific ratios. Investors can therefore diversify their mutual fund-based portfolios through these funds. As these funds maintain a balance between both debt and equity segments they aim to offer a risk-reward balance and optimize your returns.
Equity takes up about 40-60% of a Balanced fund’s portfolio. Balanced Funds aim at assured capital appreciation and safety against potential risks.
These funds are appropriate for investors seeking a mixture of capital appreciation as well as low-risk investment options.
Following are the main features of Balanced funds in India:
- Balanced funds invest across equity and debt assets in a composed ratio.
- Investing in Balanced funds allows investors to diversify their portfolios.
- Balanced mutual funds aim to minimize an investor’s risk exposure by investing proportionately in equity and debt.
- The fund managers of hybrid funds have the upper-hand to adjust the fund’s portfolio according to changes in market conditions.
- Balanced mutual funds are prone to lower risk in comparison to equity mutual funds.
- These funds automatically re-balance an investor’s portfolio when there are extreme fluctuations in the market. Consequently, Fund managers sell equity mutual funds to maintain the fund’s performance and vice versa for rebalancing.
Who Should Invest in Balanced Fund?
These mutual funds are appropriate for investors who seek income from their investments along with medium capital appreciation. Therefore, if you have low-risk tolerance, you can invest in these mutual funds to balance out investment risks and returns.
Unlike equity funds, Hybrid funds do not follow variable asset allocation according to the market conditions. They strictly adhere to their line of asset allocation rules. These funds do not exceed the mandated exposure norms. It helps hybrid funds generate higher returns from their equity investments during bullish markets.
Advantages of Investing in Balanced Fund
Balanced Funds offer the following advantages to investors:
1. Taxation benefits: Fund Managers of Balanced funds migrate between debt and equity investments without presenting investors with a tax liability. So if you were to move between these funds outside the hybrid fund investment taxation under capital gains would be applicable.
2. Risk reduction: Investing in equity funds is riskier if you do not focus on the diversification of your investments. Thus, the debt instruments in hybrid funds ensure the risk by equity funds is balanced.
3. Diversification of investment portfolio: These funds are good for diversifying your investment portfolio. You can therefore optimize your returns and mitigate market-related risks through these hybrid funds.
4. Protection from inflation: Balanced funds comprise a portion of debt assets that act as an inflation hedge. In case the investment includes international bonds, they can protect investors from inflation. As it further diversifies the investment to countries not affected by inflation. Therefore, the diversity these funds offer to your portfolio cushions it against the sustained rise in market prices.
What is an Equity Fund?
Equity mutual funds invest largely in the shares of various companies to generate returns. An Equity Fund Manager spreads his investment across companies from different sectors to offer great returns. Investments may also be done in companies with varying market capitalizations. Typically, equity funds generate better returns than term deposits or debt-based funds. However, they are prone to higher risk in comparison to other types of mutual funds. The performance of these funds depends on various market conditions.
Moreover, equity funds are not recommended for all types of investors. There are no ‘one size fits all’ type of equity funds instead they are based on the investment objective. Selection of the most appropriate equity funds must be on the basis of your risk profile.
Advantages and Limitations of Investing in Equity Funds
Equity mutual funds invest mostly in the stock market. Your investments in these funds are subject to high risk but they may generate good returns as well.
You must consider the following advantages and limitations before investing in equity funds:
1. Capital appreciation: Equity funds are known to provide higher returns in comparison to other funds. Investors can amplify their wealth manifolds in the long run.
2. Professional expertise: Equity Fund Managers have vast experience in managing portfolios. Consequently, it gives investors assurance of the safety of their investments.
3. Tax benefits: Equity investors can avail of tax benefits to the sum of Rs. 150,000 under Section 80C of the Income Tax Act.
4. Small systematic payments: Systematic Investment Plan (SIP) in equity funds allow investors to deposit money in small portions at regular intervals. In other words, this is useful for you if you do not want to invest a large sum of money in one go. You can also achieve the benefit of averaging through SIP.
5. Liquidity: Equity funds are mostly liquid in nature allowing investors to withdraw their money whenever they need it.
1. Higher costs: Equity funds are professionally managed and have a higher expense ratio in comparison to other funds. Thus they entail a higher cost in terms of the salary of the fund manager and exit ratio.
2. Higher risks: Equity funds entail higher risks than debt funds. Thus they are not suitable for investors who do not have a huge risk appetite. You must not increase the investment proportion in equity funds if you want to lower your investment risk.
3. Lock-In: ELSS funds are less liquid as they have a lock-in period of 3 years.
Who Should Invest?
Investment in mutual funds must be in sync with the investment horizon, risk profile, and other objectives. Similarly, for equity fund investments it is advisable to invest keeping a long-term goal in mind. It will ensure your investment gets time to combat market movements and fluctuations while generating returns.
Difference Between Balanced Fund and Equity Fund
The following are the comparison between Balanced Fund vs Equity Fund.
|Parameters||Equity Funds||Balanced Funds|
|Degree of Risk||Involves a higher degree of risk as market fluctuations affect it greatly||Involves less risk as Debt investments in your portfolio minimize the volatility|
|Returns||Higher than Debt Funds||Returns may vary depending upon fund composition|
|Liquidity||High Liquidity (except ELSS)||Less liquidity in comparison to Equity Funds|
|Suggested Investment Horizon||Long Term (5 to 7 years at least)||Medium Term (3 to 5 years at least)|
|Portfolio||Full exposure to equity stocks only||Proportionate distribution of Debt and equity portfolio. Most funds have a major share in equity|
|Taxation||Long Term Capital Gain up to Rs. 1 lakh is NIL. Above the threshold amount, LTCG tax is applicable at 10% without the benefit of indexation. While Short Term Capital Gain is taxable at 15% only||Equity-oriented funds are liable to taxes as Equity funds. While Debt-oriented funds are liable to taxes as Debt Funds|
|Suitability||Investors with long-term financial goals and high-risk appetite||Investors with medium-term goals and lower risk appetite|