Equity Balanced Funds - Benefits, Taxation, How to Choose

What is Equity Balanced Funds

An Equity Balanced Fund is a type of mutual fund which invests in Equity, Debt and sometimes Money market Securities according to market conditions. It is also known as an aggressive Hybrid fund. A balanced fund acts as a great risk diversification tool in a single fund as it offers the benefit of higher expected returns from equities while offering protection from market volatility due to its debt component. 

Normally Balanced funds invest 65-80% in Equity, 15-20 % in Debt & sometimes up to 5 % in Money Market securities. Debt Securities play a defensive role. A well-managed balanced fund ousts equity funds by investing in 80% in equity when markets are performing well and up to 35% in debt when debt yield is high & equities are overpriced.

Balanced funds are a good medium-term investment for those who don’t have a high enough risk appetite to invest in a pure equity fund, but are looking for a mixture of safety, income, and modest capital appreciation.

It is also useful for those who don’t want to invest in and track different funds in order to achieve diversification.

Taxation

Equity balanced funds generally have large portion of their corpus (at least 65%) invested in stocks and qualify for the same tax treatment as equity funds. 

  • The gains are subject to long-term capital gains tax if the fund is held for a period of at least 1 year from the date of investment. Long-term capital gains (LTCG) on balanced funds up to Rs 1 lakh is free of taxation. LTCG above Rs 1 lakh is taxable at the rate of 10% without the benefit of indexation.
  • In case the units are redeemed earlier than 1 year from the date of investment, the gains are subject to short term capital gains. There is a 15% tax on short-term gains from Balanced funds

Balanced funds will give you taxation advantage over debt fund if the holding period is greater than 1 year and less than 3 years. Debt funds attracts a capital gains tax equal to the tax slab of the investor, without the benefit of indexation, if the holding period is less than 3 years.

Advantages of Equity Balanced Funds

  • Owing to investments in both Equity & Debt, balanced funds offer a good diversification among the 2 major asset classes. Equity component offers the benefit of capital growth through stock price appreciation and dividend income, while the Debt component provides stability through investment in fixed income securities & bond price appreciation.
  • The major advantage of balanced funds is the ability to switch from a high equity allocation with more aggressive growth-oriented stocks when the market is bullish to low equity allocation with more defensive stocks when the market turns bearish.
  • It is less volatile than pure equity funds. Balanced funds mostly have stable and consistent returns for a long period. Best balanced mutual funds have offered better risk-adjusted returns in the long run compared to equity returns. A comparison is given below.
Fund Category5-year Rolling ReturnRisk-based Std. Deviation
Balanced Funds13.20%2.9
Large-Cap Funds12.90%3.47
Mid-Cap and Large-Cap Funds13.96%3.82
Diversified Funds14.91%3.96

 

Disadvantages of Equity Balanced Funds

Just like every coin has two sides, balanced funds too have their disadvantages. Following are few disadvantages of Balanced Funds 

  • A higher portion of balanced funds is invested in equity. Which implies that it is not a low risk investment
  • The second disadvantage of investing in a balanced fund is that you do not have control over asset allocations. All such decisions are to be made by the professional fund manager who is managing the fund.
  • Balanced fund’s Returns are lower than equity funds in the long run.
  • If you are investing for short-term then the management fees is higher than in the case of debt schemes.

How to choose Right Equity Balanced Fund?

The following are some important parameters to consider before selecting the right balanced fund. 

  1. Past performance of the fund – Choose a fund which is giving consistent performance.
  2. Rating check – One can check the rating of a Balanced Fund from a reliable source.
  3. Risk Return Ratio - Risk return ratios like Sharpe ratio and standard deviation are good indicators of the inherent risk in the portfolio.
  4. Total Expense Ratio (TER) – It is a very important parameter while selecting a fund. A higher Expense ratio will reduce the fund’s expected return. However, one must not outright reject a high expense ratio fund, as the fund manager may be better, and this could lead to higher returns.
  5. Portfolio Manager’s Experience – A fund manager plays a key role in the fund’s performance. A fund manager is an ultimate decision-maker and his viewpoint counts a lot. So before investing one should verify the experience and past performance of the fund manager.
  6. AUM of Fund – A fund should have considerable AUM. Less AUM in any scheme is very risky as it is difficult to tell who the investors might be. The exit of any big investor out of any mutual fund may impact its overall performance negatively, and the remaining investors in the scheme will have to bear the impact. In schemes with larger AUMs, this risk gets minimized.

Conclusion

An equity balanced fund is well diversified and suitable for people who have a moderate risk profile. It has the potential to create great wealth for them in the long run.

Also Read:

Top Performing Large Cap Equity Funds

Best Multi Cap Mutual Funds to Invest

Best Small Cap Mutual Funds to Invest

Best Mutual Funds to Invest in for Long Term

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