Why Balanced Mutual Funds Are Good Choice For First-Time Investors

Posted by somesh mane on August 24th, 2018

When one thinks about investing in the stock market - the first thought that generally pops up is ‘risk’. Investing in the stock market carries with itself a certain level of risk. Equities are a preferred choice for investors who have a high-risk appetite and want high returns. Debt funds, on the other hand, are a suitable choice for investors who have a moderate risk appetite and want steady income. But what if an individual wants to dip his or her hands in both. It has been observed that first-time investors are inclined towards equity investments, but are hesitant to take on the risks associated with it.

Balanced funds are a type of mutual funds where investors’ money is put into a mix of equity and debt funds. This not only safeguards the investor from inflation, but also helps him or her achieve better post-tax returns. For tax purpose, however, this kind of mutual fund is classified as equity funds since at least 65% of money is put in shares. This helps ensure that there is no capital gain tax, if an investor decides to stay invested for at least a year. Additionally, the dividends are tax-free. Balanced funds are the only mutual fund scheme where even the debt component is taxed as equity. Taking into consideration all of these benefits, this type of mutual fund is the best positioned for investors.

Types of Balanced Funds

Balanced funds can essentially be divided into two categories:

1. Equity-Oriented Balanced Funds: Here, the fund managers will invest a larger portion of the investors’ money into equities and equity derivatives. Investments are also made in different money market and debt instruments. The capital appreciation in case of equity-oriented balanced funds is usually aggressive, and interest income from debt instruments tends to take the back seat. An essential point to be noted is that although the returns generated in this type of mutual fund is similar to that of regular equity mutual funds, the risk associated with equity-oriented balanced funds is much lower, thereby making it a good option for new investors.

1. Debt-Oriented Balanced Funds: This type of mutual fund is a suitable investment option for investors who are conservative. A large portion of the investors’ money is put into debt and money market instruments, which in turn means that the risk the investors have to take on is relatively low.  Debt-oriented balanced funds have the potential to provide consistent long-term returns.

Best Performing Mutual Funds

Before investing, one needs to be aware of what the best performing mutual funds are. We have compiled the names of the schemes, along with their NAVs, 1-year return, 3-year return and 5-year return.  Here is a look at the top 5 best mutual funds:

Besides new investors, the above mentioned best mutual funds are also a good investment choice for investors who are conservative or want better returns than debt funds.

Choosing a Balanced Fund

Besides looking into the history of the schemes, choosing a balanced fund requires careful evaluation of one’s long-term goals. Experts suggest that when an investor is deciding which type of mutual fund to put money in, the deciding factors of both the asset classes i.e. equity and debt need to be considered. On the equity part, investors need to look into factors like the fund house, asset value, constancy of portfolio, fund manager, diversification, asset size, risk taken by the fund, and the historical returns. When considering the debt funds, investors should pay attention to the fund manager’s qualification, asset quality, and sensitivity of the fund to changes in the rate. 

The above-mentioned best performing mutual funds can be taken into consideration while shortlisting plans for investment consideration as they belong to prominent fund houses and have delivered positive results in the past. However, it is essential to analyse one’s own short-term and long-term financial goals and then ascertain which plan is able to meet the objectives the best.