September 28, 2021

The World Stock Markets Tips & Targets, News, Views & Updates

The World Stock Markets Tips & Targets, News, Views & Updates

Why balanced funds are suitable for first-time investors and senior citizens

Many investors prefer deploying their money in fixed-income instruments instead of investing in the market. Most of them prefer fixed deposits rather than equity-oriented investments. However, mutual funds are turning out to be a relatively better option for many investors. After taking into account the post-tax returns and adjusting for inflation, the effective return from fixed-income products is low or even negative in some cases. In contrast, mutual funds have a variety of options to choose from depending on their risk profiles. Yet, they can expect a better effective return than fixed-income investments.

Balanced funds are quite popular as a category. After the SEBI’s re-categorisation, these funds are called hybrid schemes, although they are popularly still referred to as balanced funds. As the name suggests, they offer a hybrid solution to investors – a mix of both equity and debt. While the equity portfolio holds the potential for delivering high inflation-adjusted return over the long term, the debt portion provides stability.

A hybrid fund investor may expect returns higher than fixed-income products but not similar to that of pure equity schemes. The volatility in the NAV (net asset value) of balanced funds is relatively less than in equity funds. There are three major categories that have predominant exposure to equities.

-balanced hybrid

-aggressive hybrid

-dynamic asset allocation or balanced advantage

Balanced Hybrid: In a Balanced Hybrid Fund, the equity allocation has to be between 40 percent and 60 percent of the total assets, while debt allocation has to be between 40 percent and 60 percent. This ratio gives a balanced flavour to the fund and keeps it less volatile.

Aggressive Hybrid: In an Aggressive Hybrid Fund the equity allocation has to be between 65 percent and 80 percent of total assets while debt allocation has to be between 20 percent and 35 percent of total assets. As the equity allocation is slightly more in it than the Balanced Hybrid Fund, the fund suits investors with a bit more aggressive risk profile.

Dynamic Asset Allocation or Balanced Advantage: If you are unsure about how to diversify between assets and want to leave it to the fund managers to do the job, a Dynamic Asset Allocation or Balanced Advantage scheme would suit you as investment in equity and debt is managed dynamically in them.

Many youngsters and even senior citizens shun investing in mutual funds, assuming that all funds invest only in equities. As a beginner, one may start investing in balanced funds and slowly increase the investments in tranches. To start with, first-time investors and senior citizens who have not yet invested in equity oriented mutual funds or Balanced Funds, may consider investing at least 10 per cent of their savings in them.

Even senior citizens who park their funds in fixed deposits may consider investing a portion of their money in Balanced Funds, as some exposure to equities is anyhow required even during retirement. Balanced Funds could be a better alternative compared to fixed deposits as they have a better potential for high risk-adjusted return over the long term. As an investor, you get the best of both worlds – the potential of equity to deliver high returns and stability of debt to keep volatility at bay.

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