Balanced funds, as the name suggests, are hybrid funds which typically invest in equities and debt instruments. There are equity-oriented as well as debt-oriented hybrid plans.
The advantage of a balanced fund primarily is that it achieves a certain amount of diversification, in the investment made, automatically. The asset allocation is taken care of by the fund manager, as they typically rebalance the portfolio on a need basis. So, if a balanced fund typically has a 70:30 asset allocation towards equity and debt, the fund manager will typically maintain this, barring unusual circumstances. Unusual circumstances can be situations where there is too much market turbulence or the markets are headed one way and there is a chance of overheating.
The benefit of having a balanced fund became apparent when the markets plummeted in 2008 — balanced funds, due to their exposure to debt investments, suffered lesser losses compared to equity funds.
So, the most important benefit of investing in a balanced fund is to ensure a desirable asset allocation, which is insulated from the sudden euphoria or the depths of panic, which normal investors are typically prone to.
HDFC Prudence Fund, DSP BR Balanced fund, Birla Sunlife 95 and some others, have also given over 20% CAGR, over a five-year tenure.
But, is there any downside to balanced fund investing? Yes, there is. Since there is both the equity and debt component in the portfolio, and their performance is not disclosed separately, one is not sure about the performance of the equity and debt portions. It can be that the equity portion is doing well but the debt portion may give a middling performance. One can never be sure of this. But still, this is a minor factor. There is enough persuasive evidence to finally settle for some well-chosen balanced funds.
Categories: Mutual Fund