”Rule No.1 Never Lose your capital, Rule No.2 Don’t forget rule No.1”. There is a widespread myth in the stock market that in order to get higher return, you have to take more risk. Nothing can be far from truth. The secret of making money successfully in stock market is to focus on minimizing the risk, and the returns will take care of themselves. But how do you make sure that your risk is minimal while returns are good? The answer lies in balanced funds.
What are Balanced Funds?
Also called hybrid funds, these are mutual funds that own both debt and equity. Put simply, balanced funds maintain a balance between both the asset classes, giving you the best of both worlds.
Balanced funds have recently started gaining popularity, because of their unique ability to provide safety of capital and also better returns compared to pure debt funds.
Such funds are usually popular among those investors who are risk averse, but want to take advantage of high compounding returns offered by equity markets.
This allows investors to balance their exposure to a particular asset class and regulate how much risk they want to take.
How Balanced funds work?
Balance funds, as the name suggests, balance your exposure to the debt and equity market by optimizing fund’s exposure between debt and equity market.
For example, if a fund manager is optimistic about the future course of the market, and wants to benefit from the positive market outlook, he can increase his exposure in equity market, by allocating major part of his investment in equities.
Similarly, if on the other hand, if the fund manager thinks that the market is overvalued and the correction is long due, he can reduce the exposure to equity funds and allocate majority of funds in debt instruments.
This not only safeguards investors from market volatility, it also provides fixed returns to investors till the market becomes attractive to invest back again.
Advantages of Balanced Funds:
Investing in balanced funds can be advantageous in many ways, some of those advantages are listed below:
One of the biggest advantages of balanced funds is that they reduce your investment risk by balancing your exposure towards debt and equity.
When investing in a balanced fund, you can optimize your exposure to equity and debt, so that when equity market becomes risky, you can chose to reduce your exposure by booking some profits and investing in debt instruments.
On the other hand, when the market are fairly valued and lot of stocks are trading at attractive valuations, a fund manager can pick stocks carefully, increasing his exposure to equities, and holding them for long term, providing multi-fold return to investors.
Best for First Time Equity Investors:
Balanced funds can be a great investment instruments for first-time equity investors, who do not have much knowledge about investing in equity market and are usually highly risk averse. Also since your funds are managed by professional, you don’t have to worry about the asset allocation etc.
Stable and Consistent Returns:
While equity returns are higher compared to other funds, the biggest drawback of these funds is that the returns are highly volatile.
In other words, while the returns on equity funds may vary, balanced funds mostly have stable and consistent returns for a long period of time.
Disadvantages of Balanced Funds:
Just like every coin has two sides, balanced funds too have their own disadvantages which are listed below:
They are not risk-less:
Contrary to popular belief, balanced funds are not completely risk-less. Every balance fund has 50%-65% exposure to equity market. Such huge exposure itself is a strong evidence that despite not being pure equity fund, balanced funds still have a risk factor.
You do not have control over decision making:
The second disadvantage of investing in a balanced fund is that you do not have authority over choice of funds. In other words, you cannot make a decision on how much investment in what sort of equity or bonds should be made. All such decisions are to be made by the professional fund manager who is managing the fund.
Returns are lower than Equity Funds:
While balance finds can be safer option to invest in stock market, the safety comes at a price.
Most of the balanced funds usually under-perform equity mutual funds especially during bull market as a part of their fund still remains allocated to debt funds.
This restricts balanced funds from taking full advantage of equity bull run and investors have no other option but to live with mediocre returns.
Finally, the fee charged by a balanced fund is high compared to potential return received, since the team of fund managers and research analysts involved have to do the tough job of analyzing both equity and debt market in order to optimize returns, the fund fee charged by balance funds is comparatively higher.
Who Should Invest in Balanced Funds?
So, who should invest in balanced funds? Is it suitable for everyone? Well, since balanced funds are more focused towards safety of your capital, in my opinion, these funds are suitable for those investors that are new to the stock market and have little or no knowledge about investing.
Secondly, those investors that are risk averse, and are close to retirement ( let’s say 5-7 years), can invest in this fund.
Top Balanced Funds of 2019:
As per cleartax.in, it has created a list of top balanced mutual funds for 2019, based on their performance in the past 5 years and 3 years of performance.
Although I do not suggest you to look at past performance as the only factor for choosing a fund, still, it gives you a starting point to explore more about how these funds are managed and what stocks or bonds they hold?
Here is a link to the page:
(Note: this is not a sponsored post for cleartax.in, nor I am affiliated with cleartax.in in any way, the link is being shared just for your knowledge and awareness)
Balanced funds can be a great way to create wealth passively by investing in equity markets, while preventing overexposure, thus mitigating your risk in a highly volatile market.
However, it’s also true that this safety comes at a cost of mediocre returns. Thus investors looking to invest in balanced funds should also analyze the behaviour of the and the fund manager by looking at the how markets fared in the past and how the fund manager allocated capital to maximize return and minimize risk.
I hope you found this post useful and knowledgeable. Thank You for reading.