How balanced funds are ideal for equity exposure

The best answer to this volatility and to earn high return in the longer run is investing in Balanced Funds of mutual fund. Balanced mutual fund schemes invest around 65-85% in shares of listed companies and the balance 15-35% in debt instruments.

They provide an ideal mix of growth (equity) and safety (debt instruments). Your success as an investor depends upon your ability to choose the right investment options. This, in turn, depends on your requirements, needs and goals.

According to me there are three major advantages if you invest in a balanced fund with a long term view and take calculated risk.

1) Investing in Equity

It is proven fact that in a developing country like India, equity will give good inflation adjusted return if you invest systematically and stick to your investment. As balanced fund largely invest in equity, investors get the advantage of participating in economic growth of the country. It is necessary to understand equity as an asset class before investing.

You cannot expect overnight profit from equity, as it is always a long-term game. If you understand and follow the basic rules of investing in equity then this volatility in stock market is unlikely to disturb you.

Firstly your time horizon for investing in equity should be minimum 5 years and above. Never try to time the market and always invest systematically is the success mantra for investing in equity.

Risk comes from not knowing what you are doing. If you take calculated risk it will benefit you in the longer run. Economy also runs in a cycle; like good phase, bad phase is also not permanent.

2) Auto Rebalancing

It is not only important to invest according to asset allocation but it is equally important to review and rebalance the portfolio periodically. Rebalancing is the process of restoring your portfolio back to its original asset allocation.

The rebalancing happens automatically in balanced fund and the same gives you added advantage when the markets are too volatile. As per objective of the scheme which is pre decided fund manager of the balanced fund can’t invest more or less in equity in any given point of time.

When the markets are high the fund manager has to compulsory sell equity to maintain the maximum level and likewise when the markets are low fund manager has to increase the investment in equity to maintain the minimum level of equity investment. The process is continuous which a normal investor can’t do because of lack of knowledge and expertise.

This is a proven fact that when markets are falling investors sell in panic and when the markets are rising  investors become excited to invest further in equity which is not a good idea for equity investment. The returns in equity are generated when the markets are low when you accumulate more units in your folio. 

The balanced fund exactly does the same thing and therefore gives better result in the longer run compared to traditional instruments.

3) Tax free debt

In investment, you should look at post-tax returns and not gross return, which is offered to you. The investment in fixed deposit and postal schemes are subject to normal rate of tax as per your individual tax slab, which reduces your overall return.

The investment in debt funds of mutual fund gives you the advantage of indexation after one year but still you have to pay some tax on gain. EPF and PPF have the upper limit where you can not invest more than prescribed limit.

The balanced fund is the only instrument where the entire debt is tax free after holding the fund for more than one year as long term capital gain in equity is tax free. The balanced fund come under equity category as it invests more than 65% in equity.

Even for any reason if you withdraw from balanced fund within one year the tax rate is fix at 15% and not as per individual slab.  This is a huge advantage for those who fall in higher slab rate.

Investing in balanced funds of mutual fund is one of the best solutions for investing in equity for the long-term. Further if you invest in balanced fund systematically via monthly SIP than is likely to give you better result.

You should be careful while selecting the right balanced fund, as there are around 20-plus balanced funds available in the market. Choose a fund which is at least 3-years old and has good asset under management (AUM).  You should also check the ratings given to the fund by good rating agencies.

You should also monitor and review the performance of fund chosen by you and see that it consistently beat the benchmark and is not far behind against its peers.

It is always advisable to take the help of professional so that you can invest in good performing balanced fund and who also help you in monitoring and review process.

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