Having a diversified portfolio with investment options across varying securities and asset classes is always desirable. This is because diversification helps to diminish risks to a great extent. However, in the quest to diversify an investment portfolio, an individual often ends up investing in different types ofmutual funds. Wouldn’t it be wonderful if you could invest in numerous asset classes via one fund itself? Well, there is. Balanced funds help you exactly do the same.This article serves as a guide on what is balanced fund and who should invest in it.
What is a balanced fund in mutual fund?
Balanced funds, commonly known as hybrid funds, are a class of mutual funds that contain a stock component, a bond component, and,some times, a money market component in a particular ratio in a single portfolio. These mutual funds aidinvestors to diversify their portfolio by investing in asset classes such as debt and equity.
Advantages Of Balanced Funds
Following are some of the benefits ofinvesting in balanced mutual funds:
- Re-balancing of mutual funds
There are times when equity markets are overvalued as compared to the debt and vice versa. In these situations, a fund manager has the liberty to diversify across the 2major asset classes (debt and equity) and balance the fund’s performance against market fluctuations.
- Risk reduction
Investments in pure equity mutual funds attractsubstantialrisk as the equity market couldcollapseprominently in extreme situations. The debt component in balanced funds aidsinvestorsto weigh out the risk posed by the equity component.
- Portfolio diversification
Hybrid mutual funds offer diversification in a single mutual fund. This permits fund managers to maintain a diversified investment portfolio with investments across different asset classes, i.e.debt, equity, andmoney-market instruments. Diversification servesthe dual purpose of capital appreciation and risk reduction.
- Protection from inflation
Owing to their unique asset allocation mix, wherein the debt component offerssteady income and the equity component aims to offer higher returns. Thus, balanced mutual funds act as ahedgeagainst inflation.
Who should invest in hybrid mutual funds?
These funds are ideal for those who seek safety, income, and capital appreciation to an extent from their mutual fund investments. Those with low-risk apettite, such as retired investors, can invest in these mutual funds to balance out the risks vs returns.
Usually, equity funds follow flexible asset allocation according to the market conditions. Balanced funds hold an edge over equity mutual funds. This is because equity funds strictly follow their line of asset allocation rules and never exceed the mandated exposure norms. This is why balanced funds produce higher returns from their equity component during bullishmarkets.
The strategic philosophy behind balanced funds is asset allocation anddiversification. Most investors invest in balanced funds intending to createwealthvia equity component and to mitigate the volatility via debt allocationin the portfolio. Happy investing!