What is a balanced mutual fund?
Is a balanced fund suitable for me?
What is the tax treatment of returns from a balanced fund?
Since, balanced funds have equity portion greater than 65%, so they are considered at party with equity funds and hence they are eligible for exemption from long term capital gain tax if held for more than one year. Where, mutual fund units are held for a period shorter than one year, the short term capital gain is taxable at 15%.
Balanced Funds vs Investing in Equity Funds and Debt Funds separately
Missing the benefit of exemption from long term capital gain tax on debt fund
The 35% capital invested separately in debt fund will not be eligible for exemption from long term capital gain tax and hence 20% tax would be payable after indexation if held for 3 years or more. However, complete exemption from long term capital gain tax would be allowed on whole investment in a balanced mutual fund if held for a period of just 1 year or more.
Missing the safety cushion of portfolio re-balancing
Generally on account of higher capital appreciation from equity portion as compared to debt portion in a balanced fund, the overall asset allocation gets more inclined towards equity. Balanced fund managers aim to maintain equity and debt allocations within certain target ranges. If the allocation towards equity exceed the target range then fund managers rebalance their asset allocation to bring it back within the target range. If stock prices run up substantially, then fund managers will book profits in stocks and re-invest in debt. When stock prices fall substantially, fund managers will invest in equity to bring asset allocations back within target ranges. Asset rebalancing results in greater returns stability for balanced funds compared to riskier asset categories like equity mutual funds.
Balanced funds are targeted at customers with moderate risk appetite. Make sure that the equity portion of the portfolio does not have too high an exposure to mid-cap stocks and the debt portion does not carry too much duration risk. Check past performance and make sure that the fund has consistently beaten its benchmark (usually the Crisil Balanced Fund Index). Click here to read more about how to select the best mutual fund.
Sahil Goel | LinkedIn