Balanced Mutual Fund

Balanced Mutual Fund

A balanced mutual fund is a form of hybrid fund that includes stocks, bonds, and even a market component in a single scheme. Essentially, it’s a mix of both equity and debt, making this scheme more balanced. Hence the name. 

What is a Balanced Mutual Fund? 

 A balanced mutual fund contains both stock and bond components, typically in the ratio of 70% and 30% respectively. Stocks are usually a very volatile market but provide greater rewards. However, bonds are the opposite. They offer decent but stable returns and a fixed ROI, which can outperform even when stocks performs poorly. 

Understanding a Balanced Mutual Fund 

A balanced mutual fund is a form of hybrid fund scheme as it includes two or more asset classes. It is a very popular choice among new investors as it has fewer risk factors and tends to provide a mixture of safety, income and growth. However, the value of each asset class doesn’t change over time, which is in stark contrast to life-cycle bonds, where the value can indeed change to lower any possible risk factors that may arise as it approaches the maturity date. Hence, the name life-cycle, as the values cycle through and change. You don’t get such benefits with a balanced mutual fund, but then again you also don’t get such rewards with life-cycle bonds. Both balanced mutual funds and life cycle funds have their set of pros and cons. 

Advantages of a Balanced Mutual Fund 

Here are some of the ways a balanced mutual fund can benefit an investor in the long run. 

  • Funds Rebalancing 

It’s not uncommon to see overvaluation of the equity market as opposed to debt, and the reverse is also known to happen. If that were to happen when your investment is in the market, a fund manager rebalances the two assets of your investment and weed out any risk factors that could appear in the near future. 

  • Lowers Possible Risk Factors 

The stock market is very prone to risks, and since stocks comprise the highest percentage of your balanced mutual fund investment, there is a big risk factor associated with it. However, the fixed ROI and stability of the bond allow the investor to even out for any dips in stock prices that may happen due to market fluctuations. This helps lower possible risk factors. 

  • Allows for Investment Portfolio Diversification 

The balanced mutual fund scheme is an excellent way of diversification of your investment portfolio, thanks to its dual asset benefits. 

  • Protection against Inflation 

Due to the dual nature of the scheme, balanced mutual funds are protected against inflation as the bond can generate a solid and fixed ROI, which will protect your investment against short-term inflations. 

  • Tax Implications 

Almost all capital gains are taxed and the balanced mutual fund is no different, but the tax implications are slightly different depending on: 

  1. Equity-based Balanced Mutual Funds Scheme: The tax implications on an equity-based balanced mutual funds scheme is just how you would expect on any other equity funds. This essentially means any capital gains that you earn for a minimum of 1 year holding period are tax-free, so long as it is under $1,220 approximately. However, once this limit is exceeded, a 10% tax will be levied. 
  1. Debt-based Balanced Mutual Funds Scheme: The tax implications on a debt-based balanced mutual funds scheme is just like how you would find in any other debt fund. So, this scheme will be taxed according to the appropriate tax slab. 

Drawbacks of Balanced Mutual Fund 

An investor is not in control of the asset allocation. It’s the funds that decide the asset allocation. Usually, a 70% stock and 30% bond ratio is used for asset allocation, but that can change depending on the funds. This ratio may not always fit well with the investor’s goals and requirements, but they can do nothing about it. 

Example of a Balanced Mutual Fund 

VBIAX, short for Vanguard Balanced Index Fund Admiral Shares is an example of a balanced mutual fund that has a higher-than-average reward system while having a lower-than-average risk factor. This scheme’s asset allocation is in the ratio of 60% and 40% for stocks and bonds respectively. The higher bond ratio is what allows the scheme to have lower risks. 

Frequently Asked Questions

A balanced mutual fund allows the investor to gain a healthy sum from the stocks soaring while the bonds will protect the investment in case there’s a sudden dip in the valuation of the stocks. 

If you are an early investor who’s not looking for those “high reward with risk” schemes, then a balanced mutual fund could be an excellent choice. You stand to gain whenever the valuation of the stocks rises without risking too much when the stocks dip. 

The one major disadvantage of balanced mutual funds is that the investor is not in control of the asset allocation. Usually, the ratio of the asset allocation is around 70% and 30% for stocks and bonds respectively. However, that could turn in your favour by becoming 60% and 40% or get significantly worse. This is completely out of the control of an investor and that may not be what that investor was looking for in the first place. On top of that, individuals who are looking for tax-free investments may not be completely happy with it. That’s because while it does allow for some tax exemptions, it is not completely exempted from them and has its limitations. So, such individuals will have to look elsewhere if they want better tax shielding. 

Some of the benefits of balanced mutual funds are: 

  • A scheme that is balanced in terms of growth and risk factors. 
  • Allows for lower expense ratios. 
  • Relatively lower volatility. 
  • Lower risk factors. 

If you are looking for a long-term investment that has some decently high returns while having a relatively lower risk factor, then investing in balanced mutual funds sounds like an excellent investment option. However, if you are looking for tax shielding or short-term high cash flow investment, you may not be very happy with a balanced mutual funds investment. 

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