Should You Invest In Balanced Funds?

Balance funds (or equity-oriented hybrid funds) have emerged as a very popular category of funds.

- Sudipta Mittu

Two of the biggest equity-oriented funds within the mutual fund industry-- ICICI Pru Balanced Advantage Fund (Rs 16,191.72 crore) and HDFC Prudence (Rs 14,227.97 crore) belong to this category. Financial advisors are suggesting these funds to first-time investors as a stepping stone for entering equities. However, investors need to understand the pros and cons of these funds properly before entering into them.

Advantages of balanced funds 

For investors, who have a small amount of money to invest each month (say, Rs 2,000), balanced funds are a good option. Even with this small amount they can get exposure to both equities and debt and thus enjoy the advantage of asset allocation.

Balanced funds also give investors the benefit of rebalancing. A balanced fund may have a 70:30 or 65:35 exposure to equity and debt. Whenever this asset allocation goes out of sync, the fund manager will rebalance his portfolio and bring it back in line with the original asset allocation. Hence, investors who have invested in these funds don’t have to worry about rebalancing.

Balanced funds are also suitable for investors who want equity exposure, but who want lower volatility than in a pure equity fund.

One big advantage of balanced funds is that they get treated at par with equity funds for tax purposes. If you invested in two funds--an equity fund and a debt fund--to meet your asset allocation needs, only the equity fund will get the tax advantage (of no tax on capital gains after one year). The debt fund portion will get taxed as per norms. In a balanced fund, on the other hand, even the debt portion (30- 35 per cent of the portfolio) gets equity like treatment and escapes taxation after one year.