Tuesday, April 20, 2021

Balanced Funds: Best Way to Maximize Return and Minimize Risk

Investors need to invest their savings in different investment avenues like equity, bonds and other assets like fixed deposits, Kisan Vikas Patra, NPS and PPF etc. But for any investors, it is very difficult task to decide in which asset to invest and how much to invest in that particular asset. It is even more difficult than shopping with family or deciding menu at a restaurant for dinner with friends. Rather it is about hard earned money and any decision about investing that hard earned money is always very difficult. There is another reason for this difficulty. Everyone have his/her preferences for risks and returns and so no ready made or fit for all advice can work for every individual.

In situations of dilemma, mutual funds seem to be better option. However deciding right mix of mutual funds is not an easy task altogether. Finally comes the balanced mutual funds at the rescue.

What is Balance Fund?

A balanced fund a type of mutual fund which is a portfolio or combination of equity component, bond component and sometimes money market component with the purpose to maximize the return and minimize the risk for the investors. These funds relative provide higher returns than bonds without increasing much risk (however, there remains the market risks). These funds can offer moderate, high or conservative returns with proportionate risks.

These funds invest in different proportions of equity, bond and other fixed income securities depending on the goals of the funds. These funds try to give the best of both equity and bond markets by combining both. With equity component balanced funds are able to provide higher returns and while with bond or fixed income component, the funds try to provide lowest possible risk and bring stability in the funds so that in case adverse events such as downturn in the market, fund is able to minimize the risk while keeping return moderately higher.

Inflation and Equities

Investors who have dual investment objectives of minimizing risk and maximizing return oft for the balanced funds. Normally investors with low risk appetite or the retirees prefer balance funds as these funds help to keep the return higher than the inflation so that inflation does not out their wealth. The equity component of the balance funds helps in increasing the effective return for the investors.


The bond component of a balanced fund serves two purposes. First it creates a steady stream of income. Second brings down the risk by moderating volatility. Investment in high rated bonds and money market instrument not only creates periodic income streams in form of interests and dividends but also keeps the risk on lower side (unlike equity component).


Equity-oriented Balanced funds invest a larger portion of their corpus (at least 65%) equities; hence qualifies for the tax benefits as equity funds under Sec 80C of Income Tax Act. But equity oriented balanced funds are more risky and volatile than the debt oriented balanced funds.

Debt oriented balanced funds are those which invest a larger portion of their corpus in bonds and other debt instruments. These debt oriented balanced funds offer lower return and are not eligible for tax benefits. But if the holding periods exceeds three years, the capital gains are considered to be long term and are taxed at 20% indexation. So in this way, the debt oriented balanced funds can be helpful in significantly bringing down the tax burden of the taxpayers.

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