Invest in the Best Balanced Mutual Funds of 2022

A balanced mutual fund is also known as a hybrid fund. These schemes combine an equity component and a bond component in their portfolio. The mix of stocks and bonds in the portfolio can reflect a high equity component (aggressive) or a high fixed-income component (conservative), depending on the type of balanced fund.

The equity-debt composition of these mutual fund schemes strive to attain a balanced portfolio and aims to provide investors with the best of both worlds. 

List of Best Balanced Mutual Funds in India in 2022 

The table below lists the top balanced mutual fund schemes in India in 2022 as per their past performance: 

How Do Balanced Mutual Funds Work?

Financial experts have always stated that diversification in a portfolio mitigates risks. Balanced funds are a type of hybrid mutual funds that invest in various asset classes like stocks, bonds, gold, etc. These schemes are designed to have diversified portfolios.

The diversified composition of balanced mutual funds allows an investor to earn better returns compared to debt funds. Furthermore, it reduces the overall risk compared to investments in equity funds. 

Balanced funds offer a one-stop solution to investors who want exposure to both equity and debt. There are several types of balanced funds offering different equity-debt exposure. Thus, balanced funds aim to optimise the risk-reward ratio, depending on the investor’s needs. 

Depending on the stocks in the portfolio, a balanced fund’s NAV (Net Asset Value) will move up or down. The fund managers analyse the market thoroughly while selecting stocks and bonds. Thorough market research is needed to ensure the stability of a scheme and the generation of decent returns. 

Different Types of Balanced Mutual Funds 

Given below are the different types of balanced funds:  

• Conservative hybrid funds

These schemes invest 10% to 25% of their assets in equity/equity-linked instruments and 75% to 90% in debt instruments. These hybrid schemes aim to generate income from the portfolio’s debt component. Furthermore, these schemes use the equity component to enhance the overall returns. 

Investors with low-risk tolerance seeking extra returns over interest payments can opt for conservative hybrid funds. 

• Aggressive hybrid funds

These hybrid schemes focus on equities, investing 65% to 80% of the fund’s corpus in equity and equity-related instruments. The remaining 20% to 35% gets invested in debt instruments. Lesser allocation to debt instruments has enabled these schemes to carry the potential of high returns at lower risk compared to pure equity funds. 

The taxation policy of aggressive hybrid schemes is the same as equity-oriented mutual funds. 

• Balanced hybrid funds

These funds have to invest 40%-60% of assets in equity and 40-60% of the assets in debt securities. These hybrid mutual fund schemes aim to yield long-term capital appreciation by investing in the equity asset class, whereas the debt allocation balances the risk. 

SEBI (Securities and Exchange Board of India) does not allow arbitrage under this category of mutual fund schemes.

• Dynamic asset allocation or balanced advantage fund

These are dynamically managed hybrid schemes. The portfolio consists of 0% to 100% of equity or equity-linked instruments and 0% to 100% to debt instruments. The asset allocation depends on the scheme’s financial model. In other words, the fund manager of these balanced mutual funds can change the asset allocation at any time to maximise returns or minimise risks.

Investors who wish to automate their asset allocation can opt for these mutual fund schemes. 

• Multi-asset allocation fund

The portfolio of these schemes consists of investments in a minimum of three asset classes. Each asset class’s allocation percentage must be at least 10%. Besides investing in equity and debt securities, these funds invest in another asset class like gold or real estate.

The responsibility of deciding the asset allocation lies with the fund manager. Investors of multi-asset allocation funds benefit from the exposure to multiple asset classes. 

• Arbitrage fund

These are balanced funds that follow the arbitrage strategy. The portfolio of these schemes contains a minimum of 65% investment in equity or equity-linked instruments. Investors with a low-risk appetite looking for debt-like returns with equity taxation can opt for these schemes. 

The arbitrage strategy focuses on purchasing certain securities in the cash market and selling them in the futures market. This strategy facilitates the generation of returns via the price differential between the two markets. Arbitrage is profitable in volatile market conditions.

• Equity savings 

The portfolio of these hybrid schemes contains a minimum of 65% of equity/equity-linked instruments and 10% of debt instruments and derivatives. A portion of the equity component is hedged using derivatives, and its allocation percentage is specified in the SID (Scheme Information Document).

The primary objective of equity savings funds is balancing risks and returns by investing in equity, debt and derivatives. Investment in derivatives decreases exposure to directional equity. This leads to a reduction in volatility and generates stable returns. While equity assets generate growth, debt and derivatives yield stable returns. 

Who Should Invest in Balanced Mutual Funds?

Given below are details of suitable investors for balanced funds:

• People who can stay invested for a minimum period of five years can choose balanced funds. This is because a long investment horizon helps achieve a scheme’s true potential. 
• Investors who fall under higher tax brackets can consider investing in equity-oriented balanced funds. This is because such investments can lower their tax liability. 
• People seeking moderate capital appreciation and income from their mutual fund investments can choose to invest in these schemes. 
• People with a low-risk tolerance can consider balanced mutual funds. It would enable them to earn inflation-beating returns while safeguarding their investment. 

Benefits of Investing in Balanced Mutual Funds

Listed below are some of the benefits of investing in balanced funds:

• Portfolio diversification

Balanced mutual funds offer the benefit of diversification to investors from a single portfolio. A diversified portfolio serves a dual purpose—risk reduction and capital appreciation. 

• Rebalancing of funds

There may be times when equity markets are overvalued compared to debt markets. However, sometimes, the reverse can also happen. If such a situation occurs, the fund manager is free to change asset allocations. He or she can take any decision to balance the scheme’s performance against market fluctuations.

• Protection from inflation 

Balanced mutual funds ensure adequate protection against inflation. Moreover, their asset allocation provides a regular income and better returns. 

• Risk reduction 

Investments in equity funds carry significant risks. This is because the equity market can fall drastically in extreme market situations. The debt asset classes balance the risks when it comes to balanced or hybrid funds. 

Risks Associated with Hybrid Funds 

Let us take a detailed look at the risks posed by hybrid funds:

• Risks in hybrid funds primarily depend on asset allocation. The degree of the associated risks may range from aggressive to moderate and conservative. 
• Though balanced mutual funds have debt securities to protect their assets against market volatility, they are considered riskier than pure debt funds. 
• Conservative hybrid funds are associated with relatively low risks because of their high allocation to debt instruments.
• Aggressive funds are associated with high risks because of the presence of equity stocks. However, these hybrid schemes also carry the potential of yielding higher returns. 

Important Things to Consider before Investing in Balanced Funds

Detailed below are certain crucial factors that investors must consider before investing in balanced mutual funds: 

• Financial goals

Investors must have a clear financial strategy before investing in hybrid mutual funds. They need to assess whether they seek value or economic growth. Formulating a plan becomes much easier if a potential investor plans his/her objectives. 

For example, investors must formulate what exactly they are investing for. Then, they can pick the best fund for financial goals like retirement corpus, children’s education, bigger house or emergency expenses etc.

• Investment horizon

The investment horizon is intrinsically linked with financial goals. This is because once an investor understands his or her investment objective, he or she will also understand the time needed to achieve that goal. 

Remember that hybrid or balanced mutual funds are best suited for a medium-term investment horizon, for example, 3 to 5 years. A long-term investment horizon improves the chances of higher and more stable returns.  

• Risk appetite

An investor must evaluate his/her risk appetite before investing in hybrid schemes. An individual’s risk tolerance refers to how much market volatility and losses they can withstand.

Moreover, people should remember that risks and returns are inversely proportional. Therefore, evaluating and understanding one’s risk profile facilitates better investment decisions. 

• The expertise of the fund manager

AMCs (Asset Management Companies) must declare information on the performance of their fund managers. These details are necessary for investors. They need to evaluate the fund manager’s past experiences and the funds they have managed. This is essential to know because they are responsible for a fund’s performance. 

• Expense ratio

Before investing or choosing a hybrid fund for investment, people must consider the fund’s expense ratio. Like any other mutual fund scheme, balanced funds levy a fee called the expense ratio. This is a fee that investors need to pay for appropriate management of the scheme. 

A fund with a lower expense ratio is better for the investor. However, it is not necessary that a fund with a high expense ratio would generate low returns. 

Taxation of Balanced Mutual Funds

Listed below are important points related to the taxation of balanced mutual funds:

For equity-oriented funds

Balanced funds with over 65% allocation to equities are treated as equity funds and taxed accordingly. When the holding period is less than a year, short term capital gains, or STCG, are taxed at a 15% rate. 

If the holding period is one year or more, long term capital gains (LTCGs) are taxed at 10% if the capital gains exceed Rs. 1 lakh. However, capital gains up to Rs. 1 lakh are tax-free. 

For debt-oriented funds

The balanced mutual funds that consist of a higher allocation to debt instruments are taxed just like debt funds. If the investment holding period is less than three years, then short term capital gains will be taxed according to the investor’s tax slab rate. 

However, if the holding period is three years or more, then long term capital gains are taxed at 20% with indexation benefit. 

Final Word

To sum up, a balanced mutual fund has a diversified portfolio. It consists of both equities and debt instruments. There are various types of balanced funds to suit the different needs of investors. A significant advantage of these schemes is that both beginners and experienced investors can invest in them. For readers’ benefit, some of the best hybrid schemes have been listed above. 

FAQs about Best Balanced Mutual Funds