How equity-oriented hybrid funds or balanced funds work to offer high risk-adjusted returns ?

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How balanced funds work to offer high risk-adjusted returns?
Investors with low-risk appetite but yet wishing to partake some of their hard-earned money in equities through the mutual fund route can bet on the investment strategy followed in case of balanced funds or equity-oriented hybrid funds. The fund is also suitable for novice investors who have not much idea of how to trade in stocks and also are not able to clearly define their risk-appetite level as with a substantial exposure to equities, the probable chances of any gain from the investment are increased but in a controlled manner thorugh moderated levels of risk. Also, the nature the balanced funds exposes the investor to a lesser volatility in comparison to what a pure equity investment would have. Correspondingly, with low extent of volatility in the balanced funds, the risk in the investment is also minimized.

So, few of the factors that make an investment in balanced funds profitable are listed herewith:

Low volatility and low risk: As discussed above balanced funds offer lower volatility and hence risk exposure of the investor is also lowered correspondingly. Nonetheless, with equity exposure, risk is not totally nullified but a mix of equity and fixed asset instrument balances the return for the investor. So, balanced funds offering moderated levels of return and risk can provide considerable risk-adjusted returns.

Asset reallocation or flexibility in respect of asset allocation: With asset rebalancing or reallocation on an ongoing basis that means switch of funds from an asset class making profits to the other, investment in balanced is advantageous. The balanced funds Any increase beyond the threshold value is booked and the funds are transferred to the other asset class

Allocating over 65% of funds in equity provides tax relief: Though the exact percentage of allocation of funds in case of balanced funds i.e. in equity or fixed income asset class is not defined. Generally an exposure to the extent of 65%-75% is made in equities while the remaining amount is invested in fixed-income instruments.

But in case the fund allocation in equity is over 65%, the balanced fund shall be deemed as equity oriented hybrid fund that shall not attract any tax implication as is the case with equity mutual fund schemes that in case held for over a year do not attract long term capital gains tax liability.

Returns fetched by balanced funds in the last one year

With the equity and debt market being impulsive in the last one years, returns from the set of funds has been a mixed picture. More so, the returns from such funds in a year failed to provide higher return as against the benchmark CRISIL balanced index.

Nonetheless, there have been instances in the past, where returns from balanced funds has exceeded that of large-cap and small cap and mid-cap funds. This is because in case of economic downturn and when stock markets are not faring well, such funds even in spite of the negative returns fetch fixed return from debt instrument and hence offer better than pure diversified equity funds.

How and when should you invest in balanced funds?

Investor can take the SIP route to invest in balanced funds and when the market outlooks seems to remain in a range, you can plunge in your money at every low and realize profits as and when the market sees an upside. Also, as suggested to realize sufficient gains from your investment in balanced funds such as those providing tax relief, investor should lock in the investment for a period of not less than 3 years. Further, in times when the bull market prolongs for a longer period of time, investor can fail to realize much of the gains, so the apt time to invest in such equity-oriented hybrid funds is when the market is expected to remain in a range.

Read more about: balanced funds, equity, debt, tax free
Story first published: Tuesday, April 29, 2014, 11:36 [IST]
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