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A Balanced Mutual Funds Guide in India – Meaning, types, tax, features

Balanced mutual funds are the schemes that invest in both equity and debt instruments. This helps in capital appreciation through equity investing along with stable returns through debt instruments. In this article, we have covered a balanced mutual fund in detail.

Balanced Mutual Funds

What is a balanced mutual fund

Balanced funds invest in both equity and debt instruments at a balanced ratio. The ratio between equity and debt depends on the goals of the investor, market conditions, fund managers.

How does a balanced mutual fund works

Balanced funds earn by keeping a balance of asset allocation between equity and debt. The objectives of these funds are to provide both capital appreciation/income depending on the mix of equity and debt. 

The fund manager may make a change in the portfolio in terms of the weight of equity and debt to take advantage of the market movements if any.

Types of balanced funds schemes

Category of SchemesCharacteristicsType of Scheme
Conservative Hybrid FundInvestment in equity & equity Instruments – 10%-25% of total assets.
Debt Instruments – 75%-90% of the total assets
Open-ended Hybrid scheme
Balanced Hybrid FundInvestment in equity & equity Instruments – 40%-60% of total assets.
Debt Instruments – 40%-60% of the total assets
Open-ended balanced scheme
Aggressive Hybrid fundInvestment in equity & equity Instruments – 65%-80% of total assets.

Debt Instruments – 20%-35% of the total assets
Open-ended Hybrid Scheme
Multi-Asset AllocationInvestment in at least 3 asset classes with a minimum allocation of at least 10% each in all 3 classesOpen-ended scheme investing in different asset classes

Tax on balanced mutual funds

ParticularsFor equity-oriented balanced Mutual Fund*For Debt oriented balanced Mutual Fund
Period of holding to qualify as short or long termHolding period > 12 months – Long term
Holding period < 12 months – Short term
Holding period > 36 months – Long term
Holding period < 36 months – Short term
TaxationLong term capital gain:
Taxed @10%, if gains are above 1 lac a year.
Short term capital gain:
Taxed @15%.
Long term capital gain:
Taxed @20% with indexation benefit.
Short term capital gain:
The gains are added to the income and taxed as per the applicable slab rate.

* Equity oriented funds are those where at-least 65% is invested in equity stocks.

Benefits of investing in balanced mutual funds

Balanced mutual funds offer diversification amongst equity and debt instruments due to which it becomes really important to have the right mix of both. One needs to recognize carefully the mix between the two in the selected fund. 

Alternatively, this job can be left for the fund manager as well who possess the relevant expertise to find a suitable mix for you to take advantage of the volatile markets. While the equity component of the mix will help in capital appreciation, the debt instruments helps in getting a stable return.

Important points to consider while investing in balanced mutual funds

Investment Objective

Investors should be prudent enough to understand their financial goals and how a particular fund can help in achieving the same. Investment horizon, return on investment, etc. are some points that can help an investor to better evaluate his investment objective. The investment should be made only if the funds can meet the overall objective of the investor.

Understanding of risk

While the debt component of the fund acts as a shield to cover one’s risk, it is equally important to understand how much risk you can expose your wealth to as the fund has sufficient equity allocation as well, which means these funds do carry market risk.

Investment period

Investors should not invest in these funds from a short-term perspective. These funds are suitable for medium to the  long term investment horizon. An ideal investment horizon of 5+ years is beneficial for the investors.

Published on January 20, 2020