In the year to date Sensex gave around 16% return compared to the measly 6.5-7.5% return on Fixed Deposits. Does this tempt you to take exposure in equities but market volatity scare you away? You are not alone. This is a worry shared by many first time investors. Therefore it is always advisable to invest through a mutual fund route rather than taking direct exposure to stocks. While the most famous category is equity mutual funds, they come with higher volatility. The good news is you can limit the risk thrown in by the equities within mutual fund space too. How? Simply, by investing in a mutual fund category that takes exposure in both equity and debt. The type of mutual fund that carries this task effectively is hybrid equity fund aka balanced fund. It helps investors achieve the twin objective of high and secure returns by allocating their money in equity and debt.
But unlike the perception hold by most investors, allocation between equity and debt is not split in equal proportion under balanced funds. While a pure equity fund like large-cap, mid-cap or multi-cap funds are mandated to be fully invested into equities and exposes an investor to a higher risk at all times, balanced funds maintain an equity allocation to the tune of 65 per cent. The rest of the money is invested in debt which helps in limiting the volatility in returns compared to a pure equity fund.
As a result of this, balanced fund investors have a better downside protection during market downturn compared to an equity fund. But during market rallies, one has to compromise with lesser returns owing to lesser exposure in equities through the fund.
On tax front, balanced funds are treated similar to equity funds owing to more than 60% exposure in equities. If you hold them for more than a year, the returns will be tax-free; else they will be subjected to short-term capital gains tax.
In the last one year balanced fund category has given a double-digit return.Take for instance, Principal Balanced Fund and UTI CCP Fund which have returned around 23.81% and 23.33% respectively. The category average is 18%, however.
According to few reports that surfaced lately, balanced funds have been taking higher equity exposure of 75% and above especially in the mid-caps and investment in long-duration bonds to reap in better returns, thereby defeating the very purpose of the fund.
According to experts, if aim is to reduce risk check out fund's mandate on equity exposure. Ideally, one should stick with a fund where the equity exposure is kept close to 65% and fund is not taking aggressive bets on debt side too.