All weather fund
Rule No.1 - Never lose money. Rule No.2 – Never forget rule No.1
This rule is precisely followed by balanced fund.
Balanced funds invest over 65% in equity instruments with a view to earn long term returns and the remaining in debt instruments in an effort to reduce short term volatility. Balanced fund is an ideal option to have allocation in equity & debt, the two key primary asset classes. These funds are not meant to outperform the broad equity fund categories but are meant to provide superior downside protection. Thus delivering equity returns with lower volatility.
With an increase in AUM (assets under management) of balanced funds in the recent months, it can be inferred that domestic investors are slowly getting comfortable investing in this category of mutual fund. In this column, we will explain why balanced fund investments are on the increase in the mutual fund category and should from a part of all investment portfolios.
In built risk management
They are the best suitable products for those who want to participate in stock market but don't have the stomach for volatility. This is usually true for those investing in equity for the first time as the key motto of a first time investor is to protect the downside of their portfolio along with ripping the fruits of equity investments. The 35% allocation to debt helps reducing volatility & act as a cushion in volatile equity market.
Volatility measures the variation in return delivered by the selected category. The lower the number better it is for investor.
What is balanced mutual fund?
Mutual funds pool in investors' money and invest in equity, debt and other instruments prescribed by the fund mandate. As the name suggests, a balanced fund’s mandate is to balance out the risk and reward quotient by investing in a mix of stocks and bonds. Meaning, it combines equity and debt component in a single portfolio. The equity portion forms 65 percent or more of the assets managed; the rest is invested into debt and money market instruments. The primary objective of the fund manager is to achieve diversification in one product to increase returns along with stability of fund value. Their equity exposure can vary from 65 percent-85 percent depending on the fund mandate and market condition.
Asset Allocation Benefit
If one would invest in debt and equity mutual funds separately, the high volatility of equity portion may not suit investors resulting in lower equity allocation than required. Whereas, if the investor takes positions in equity through balanced funds, they get to realise equity growth potential and lower fund volatility.
Taxation Benefit
Taxation is another reason which makes balanced funds so attractive. Even though balanced funds have a considerable proportion of debt instruments, it is taxed as per equity, i.e short-term capital gain tax at 15 percent on growth amount would be applicable if the redemption of fund is made within a year of investment. No taxation is applicable if redeemed after one year of investment.
Investment Time Period
Even though there are no restrictions on redeeming the fund value whenever desired, these funds are most suitable investment options to save for medium to long-term goals ranging from 3 years to 30 years or even more than that.
Who Should Invest?
Investors who are new to equity investing should start off with balanced funds. It is advisable for investors who are in their retirement phase but with a much higher risk appetite, to opt for equity exposure only through balanced funds. All in all, if an investor wants benefits from stock returns but also want capital stability, they can opt for a balanced fund.
Investments in such balanced mutual funds are done to get the best of both worlds i.e. a mix of equity and debt investments in one product. The responsibility of asset allocation and timing the market lies in the hands of fund managers who are experts in the domain. However, the disclaimer ‘mutual funds are subject to market risks, please read the offer documents carefully before investing’ should be strictly followed. Before investing in mutual funds, it is important to have basic investing knowledge.
-Warren Buffett
This rule is precisely followed by balanced fund.
Balanced funds invest over 65% in equity instruments with a view to earn long term returns and the remaining in debt instruments in an effort to reduce short term volatility. Balanced fund is an ideal option to have allocation in equity & debt, the two key primary asset classes. These funds are not meant to outperform the broad equity fund categories but are meant to provide superior downside protection. Thus delivering equity returns with lower volatility.
With an increase in AUM (assets under management) of balanced funds in the recent months, it can be inferred that domestic investors are slowly getting comfortable investing in this category of mutual fund. In this column, we will explain why balanced fund investments are on the increase in the mutual fund category and should from a part of all investment portfolios.
In built risk management
They are the best suitable products for those who want to participate in stock market but don't have the stomach for volatility. This is usually true for those investing in equity for the first time as the key motto of a first time investor is to protect the downside of their portfolio along with ripping the fruits of equity investments. The 35% allocation to debt helps reducing volatility & act as a cushion in volatile equity market.
Volatility measures the variation in return delivered by the selected category. The lower the number better it is for investor.
What is balanced mutual fund?
Mutual funds pool in investors' money and invest in equity, debt and other instruments prescribed by the fund mandate. As the name suggests, a balanced fund’s mandate is to balance out the risk and reward quotient by investing in a mix of stocks and bonds. Meaning, it combines equity and debt component in a single portfolio. The equity portion forms 65 percent or more of the assets managed; the rest is invested into debt and money market instruments. The primary objective of the fund manager is to achieve diversification in one product to increase returns along with stability of fund value. Their equity exposure can vary from 65 percent-85 percent depending on the fund mandate and market condition.
Asset Allocation Benefit
If one would invest in debt and equity mutual funds separately, the high volatility of equity portion may not suit investors resulting in lower equity allocation than required. Whereas, if the investor takes positions in equity through balanced funds, they get to realise equity growth potential and lower fund volatility.
Taxation Benefit
Taxation is another reason which makes balanced funds so attractive. Even though balanced funds have a considerable proportion of debt instruments, it is taxed as per equity, i.e short-term capital gain tax at 15 percent on growth amount would be applicable if the redemption of fund is made within a year of investment. No taxation is applicable if redeemed after one year of investment.
Investment Time Period
Even though there are no restrictions on redeeming the fund value whenever desired, these funds are most suitable investment options to save for medium to long-term goals ranging from 3 years to 30 years or even more than that.
Differentiating Factors
Remember that investing in balanced funds is not without risk as their predominant focus is on equities. But a good balanced fund can make your experience of investing in equities less painful by reducing volatility in returns. Therefore, it is important to select the right fund. We discuss some issues with these funds that you must be aware about.
Mix of strategies and All Weather Fund
In the equity portion we also get exposure to mid cap & large cap strategy as per the market analysis of the fund manager. He can also take a call on increasing or decreasing allocation to mid and small cap stocks as per his market analysis. Same on the debt part the fund manager can also have flexibility to take a tactical call on duration strategy .Thus we get flavor of both Accrual & duration strategy on the debt part. This flexibility to use different strategies allows the fund manager to create alpha with limited volatility.
In the equity portion we also get exposure to mid cap & large cap strategy as per the market analysis of the fund manager. He can also take a call on increasing or decreasing allocation to mid and small cap stocks as per his market analysis. Same on the debt part the fund manager can also have flexibility to take a tactical call on duration strategy .Thus we get flavor of both Accrual & duration strategy on the debt part. This flexibility to use different strategies allows the fund manager to create alpha with limited volatility.
Who Should Invest?
Investors who are new to equity investing should start off with balanced funds. It is advisable for investors who are in their retirement phase but with a much higher risk appetite, to opt for equity exposure only through balanced funds. All in all, if an investor wants benefits from stock returns but also want capital stability, they can opt for a balanced fund.
Investments in such balanced mutual funds are done to get the best of both worlds i.e. a mix of equity and debt investments in one product. The responsibility of asset allocation and timing the market lies in the hands of fund managers who are experts in the domain. However, the disclaimer ‘mutual funds are subject to market risks, please read the offer documents carefully before investing’ should be strictly followed. Before investing in mutual funds, it is important to have basic investing knowledge.