What are the Balanced Mutual Funds and their benefits

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The best SIP is all about minimizing risk and maximizing returns on mutual fund investments. This is attained by investing in balanced mutual funds, which are a class of hybrid funds which are the best alternative for investors looking for a fairly good rate of return and considerable capital appreciation together with low-risk factor attached over a specified period of time.

What are balanced mutual funds?

As the name suggests, balanced mutual funds are mutual funds with an investment portfolio of a balanced investment in equity stocks and debt assets, in an almost equal ratio; i.e. a near 50:50 ratio. This kind of investment strategy is made to cushion the investor against market volatility risks while at the same time, helping him/ her earn a fair return on investment, with substantial capital gains. 

Are hybrid mutual funds the same as balanced mutual funds?

Till 2016 early 2017, the terms balanced mutual funds and hybrid funds were used interchangeably. However, after the intervention of SEBI (Securities and Exchange Board of India), there has been a change in this outlook.

To understand the difference between balanced mutual funds and hybrid funds, one needs to understand what hybrid funds are. 

Hybrid funds are basically mutual fund investments in different categories of assets; viz. equity, debt, etc. However, it does not necessitate a 1:1 ratio of investments in these asset classes. Here lies the point of difference between hybrid and balanced mutual funds.

Initially, hybrid funds with a great tilt towards investment in equity were sold by fund managers as balanced funds. But now SEBI has put the compulsion for balanced mutual funds to have a near 1:1 ratio for investment in the two main asset classes; viz. equity and debt.

Different kinds of hybrid funds and their implications

Hybrid funds can be of the following types:

  1. Balanced hybrid funds

A balanced hybrid fund is one with 40-60% of its investments in equity and the rest in the other class of assets; viz. debts. In case the investment share in equity is less than 50%, it will no longer be considered for tax benefits which are available to equity investments.

  1. Aggressive hybrid fund

An aggressive hybrid fund is one where 65-80% of the investment portfolio comprises of equity, and the rest of the investment is in debts. This helps in more wealth gain apart from a good rate of return. However, it is more risk-prone than a balanced fund.

  1. Dynamic asset allocation fund/ Balanced advantage fund

In this category of hybrid funds, the fund manager judiciously keeps juggling between different classes of assets for investment purposes depending on market conditions.

When equity prices are falling, there is an immediate urge to buy more equity and sell the debt assets. However, when equity prices are on the rise, they are sold off, and more debt assets are bought.

Advantages/ benefits of balanced mutual funds

With about a 60% tilt towards equity, which is about three-fifths of the portfolio, the benefits of balanced funds are not far to seek. These include:

  • Diverse asset classes in a single investment bucket

Diversification is the key to balanced mutual funds. In the normal course, the investor may not be able to trade in a different variety of assets (stocks and bonds), directly, in the share market. So, balanced funds provide for a bouquet of investments in diverse classes of assets.

  • Cushion against market fluctuations

Market fluctuations can play havoc with the investor’s money if he chooses to invest directly into equity. However, here, the risk of volatile markets is averted to a considerable extent because of a sizeable investment in debt assets.

  • Substantial wealth gain with good returns

Since these funds are slightly tilted in favor of equity, there is long-term capital accumulation as well on these funds. 

  • Obtain tax benefits of equity funds

Since the portfolio of balanced funds is slightly more in favor of equity, such funds are treated as equity investments for taxation purposes. Such equity funds yield a tax-free return if the funds are held for more than a year.

  • Preceding tax liability on the debt part of the investment

Individually, any income from debt funds is subject to tax if the funds are held for less than three years. But as part of balanced funds, the return from these debt funds are also treated as equity fund returns and are exempted from tax if the funds are held for a period of 1 year or more. So, under the balanced mutual fund’s umbrella, even debt funds enjoy equity status for tax benefit purposes.

  • Favorite among new investors

Balanced mutual funds are a safe bet for first-time investors.

  • Best for small investors

These funds are best for small-time investors, who do not have a large corpus of funds to invest, and therefore, have a lower risk appetite.

  • The flexibility of investments through switching of funds

Most balanced funds are dynamic asset allocation or balanced advantage funds. They give the investor the flexibility to switch to different classes of assets for investment through the fund manager. This switching is done depending on the market conditions and valuation of the asset (equity or debt or other instruments).

Top balanced mutual funds

Based on the last 5 years’ performance, the best of balanced mutual funds to invest in are:

HDFC hybrid equity fund

Launched in the year 2000, this fund has a long-standing background of success, which makes it a profitable balanced fund plan. Here are its features:

  • It is in fact, the merger of 2 funds; viz. HDFC balanced fund and HDFC premier multi-cap fund and was rechristened thus in June 2018.
  • This portfolio of this fund indicates that it is an aggressive hybrid fund tilted towards equity investments.
  • Currently, the fund has about 67% of its portfolio dedicated to equity investments.
  • About 29% of the portfolio in this fund is dedicated to debt investments.
  • Only 4% of the investments fall into other classes of assets like money market securities, etc
  • Being an aggressive hybrid fund, it yields quick returns, which is about 17% over the last 5 years.
  • It is an open-ended scheme with a minimum investment cap of INR 5,000.
  • It boasts of an impressive investment portfolio with investments in few of the top companies like Infosys, HDFC Bank, ICICI Bank, Larsen & Toubro, Tata Sons, Hero Motocorp, Bharti Airtel, etc.

Reliance equity hybrid fund

With a moderate to high-risk profile the reliance equity hybrid fund stands tall with an increasing NAV which makes it a sort after plan for investors.

  • Initially known as Reliance regular savings fund – balanced option, this balanced mutual fund falls in the category of aggressive hybrid fund.
  • It is an open-ended fund with a minimum investment requirement of INR 500 only (one of the lowest investment limits for very small investors).
  • With about 72% of its investment portfolio decked with equity investments, there is surely, more scope of wealth creation. So, it is a very sought-after plan among investors.
  • It has an impressive portfolio with investments in top-notch companies like Tata Steel, HDFC, Grasim, L & T, Infosys, Reliance, SBI, ICICI Bank, etc.
  • The fund performance over a period has been outstanding and the annual return over a 5-year period turns out to be about 16%.

L & T hybrid equity fund

L & T hybrid equity fund is an aggressive hybrid fund with a well-proven track record. Salient features of this category of the balanced mutual fund are:

  • As part of complying with SEBI’s instructions, many funds, merged, changed, rechristened themselves around mid-2018. Accordingly, the erstwhile L & T India prudence fund has been renamed as L & T hybrid equity fund.
  • Launched in 2011, it is an open-ended fund scheme.
  • With a whopping 73% equity tilt in its investment portfolio, the L & T hybrid equity fund conveniently qualifies to be one of the moderately high risk mutual funds.
  • The good part is that it invests a good 20% in fixed income debts, which somehow normalizes the risk factor of equity investments, considerably.
  • It has sizeable stakes in some of the best companies like HDFC bank, ICICI Bank, TCS, Axis Bank, Reliance, ITC, Larsen, etc.
  • With an impressive track record of returns, the fund fives about 16% return over a 5-year period.

SBI equity hybrid fund

Launched in 1995, this fund has a long-standing background of good returns and good capital accumulation over a longish period. Here is what makes it a perfect fit for investment by those interested in availing the benefits of a good balanced mutual fund:

  • Initially, it was the SBI Magnum balanced fund. In mid-2018, it has been named as the SBI equity hybrid part as part of the SEBI directive of requiring the nomenclature to be descriptive of the nature of the fund.
  • It is an open-ended growth fund with a minimum initial investment requirement of INR 1,000 only.
  • It will essentially fall in the category of aggressive hybrid funds, but the fact is that in comparison to other top aggressive hybrid funds, the equity share of its portfolio is comparatively less; standing currently at 65%. A good 6% of the portfolio is designated to totally liquid instruments and a judicious 17% approx. Is dedicated to bonds and debentures.
  • The portfolio hints at a moderate to high-risk investment environment encompassing this fund.
  • The rate of return of SBI equity hybrid fund is fairly high at around 16% over a 5-year period. This is a very good rate of return considering it has lesser equity stakes.
  • Currently, it has, within its investment bucket, some of the top holdings to boast of like Kotak Mahindra, Infosys, Bharti Airtel, BPCL, ITC, TCS, SBI, HDFC Bank, ICICI Bank, etc.

Aditya Birla Sun Life equity hybrid ‘95 fund

Like Reliance, Birla too is a name to reckon. No wonder their balanced fund scores so well. Here is an investment snapshot of the aggressive hybrid fund:

  • Initially, it was known as Aditya Birla sun Life Balanced ’95 fund. But as it became mandatory to make the fund name self-explanatory, it came to be known as Aditya Birla Sun Life equity hybrid ’95 fund, around mid-2018.
  • It is an open-ended growth fund with a minimum investment limit of INR 1,000.
  • Launched in 1995, this aggressive hybrid fund has been performing excellently on the return and wealth accumulation platform with a rate of return of about 15% over a period of 5 years.
  • Currently, it has a good 70% of its portfolio centered round equity stake-holding. 
  • This means the risk attached to is slightly high (moderately high to be precise). However, it has proven its mettle in the return of the investment domain.
  • It has investments in some of the top companies like HCL Tech, Mahindra & Mahindra, ITC, SBI, Tech Mahindra, Infosys, Maruti Suzuki, HDFC Bank, ICICI bank, etc.

 

Comparative rate of return of few of the best balanced mutual funds, essentially in the aggressive hybrid category

Here is a tabulated form of the rate of returns of the different funds over a period of 5 years:

Name of fund Fund performance (%returns over the years)
1 year 2 year 3 year 5 year
Aditya Birla Sun Life equity hybrid 95 fund -5.2 8.9 9.1 15.4
SBI equity hybrid fund -1.2 10.9 9.1 15.9
L & T hybrid equity fund -3.1 11.3 8.7 16.2
Reliance equity hybrid fund -4.1 11.2 9.2 16.3
HDFC hybrid equity fund -2.7 10.8 10.4 17.2

 

Thus, from the above discussions, it is obvious that the top performing balanced mutual funds are slightly tilted in favor of equity regarding investment. So, to be aptly faithful to the term, the top balanced funds are aggressive hybrid funds which are performing well over a fairly long period. 

 

However, the fact remains that till date the best channel to SIP investment route is via mutual fund investments in medium-cap and multi-cap categories and a judicious choice of proper balanced mutual funds to invest in. This ensures a fairly good rate of return with wealth accumulation while minimizing the risk factor attached to market volatility.

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