Friday, August 17, 2012

What is a Balanced Mutual Fund ?

There are mainly four Asset classes where you can invest your money to grow your wealth and get rich.

1. Equity  (Shares, Equity Mutual Funds)
2. Debt  (Fixed Deposit, PPF, NSC, Post office MIS, FMPS)
3. Gold / Silver / Daimond
4. Property / Real Estate

Balanced Funds are Mutual Funds with a combination of above two asset class namely Equity and Debt in varying proportion.

Lets take an example of 50:50 Balanced Fund
you invest 2 lakh rupees in a Balanced Fund with 50% Equity and 50% Debt. The fund will invest Rs.1 lakh in debt say which gives 10% return per annum and another Rs.1 lakh in Equity where return is variable.

case 1:
at the end of year stock market perform excellent and gave +40% return so your equity return is Rs 1,40,000 and your debt portion is 1,10,000 so total value is 2,50,000 so now in order to acheive your asset allocation of 50:50 you move Rs 15,000 from Equity and put in Debt so debt becomes 1,25,000 (1,10,000 + 15,000) and Equity also becomes 1,25000 (1,40,000-15,000). This is also called PORTFOLIO REBALANCING.

case 2:
say at the end of year stock market perform badly and gave -20% return so your equity return is Rs 80,000 and your debt portion is still giving 10% so it is Rs 1,10,000 so now your total investment value becomes 1,90,000 so in this case you will move Rs 15,000 from debt fund to equity fund to maintain your 50:50 asset allocation, so Equity is now 95,000 (80,000 + 15,000) and Debt is now 95,000 (1,10,000 - 15,000)

hence you see because of the asset allocation you are selling Equity when markets are high and buying Equity when markets are low.

If you have equity only exposure and you get a market like Japan which does not grow for ages then it will not help and if you have only debt then inflation will eat your earnings in the long term so like a Balanced Food is good for health, Balanced Funds are good for Investment purpose.

Balanced Funds does automatic portfolio rebalancing.

Balanced Funds with more then 65% equity exposure do have tax benefit and are eligible to get long term tax benefit and the rebalancing is done at the fund level so no tax liability to the end customer if holding period is more then a year PLUS (Debt portion is totally tax free in balanced as the profits are at fund levels, If you were to have seperate FDs then they would attract tax and would be included in your income)

Few good Balanced Funds
1. Reliance Regular Savings Funds Balanced Option
2. HDFC Prudence Fund
3. DSP BR Balanced Fund
4. SBI Balanced Fund

Balanced Funds are also called Hybrid Funds

If you are new to Mutual Funds then Balanced fund is a good way to start investing your money.

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