Balanced funds vs Equity Funds: Review & Comparison

Lets’s have a look at the difference between Balanced funds vs Equity funds, advantages and disadvantages of both types of mutual funds in India.

What are Balanced Funds?

Balanced Funds are the category of mutual funds which invests in a mix of stocks and bonds. The fund is also known as the hybrid fund. It is designed to provide investors with modest capital appreciation and provide safety from volatility.

The funds is divided into two categories, one is equity oriented and another one is debt oriented (actually called as MIP). Equity oriented fund has a higher proportion of stocks in the portfolio which is around 65-80% and rest is in debt securities. The investment in equity is done as per the investment objective of the fund which can be a mix of multi-cap, large cap or midcap stocks.

In debt oriented fund, a major portion of the asset is invested in the short term to long term duration debt securities of different credit rating. It helps in generating steady interest income and reducing volatility in returns.

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Investing in Balanced Funds: Advantages

  • Stable return: The return from the portfolio of bond and equities are not positively correlated. Bond prices are not affected by volatility in the market. Because of its balanced asset base, the return from the funds are more stable than equity funds.
  • Low Risk: Due to the fund’s mix of debt and equity, the risk factors are greatly reduced and has less effect of volatility in the fund compared to equity fund.
  • Tax efficiency: Having equity portfolio of more than 65% of asset allows it to enjoy the tax benefits. After investment period of one year, the gains upto Rs.1 lakh are tax-free. For debt oriented, short term gains are taxed at 10% till 3 yrs and investment more than 3 yrs are considered, it is taxed at 20%, after the benefits of indexation.
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What are Equity Funds?

Equity Funds are mutual funds which invest its total asset in equity stocks. The fund’s main objective is capital appreciation from the investment. Investing in Equity funds involves a higher degree of risk to volatility. There are wide range of equity mutual funds available to investors.

They are categorized according to market cap, sector, geography etc. Most popular type of funds are Large-cap Funds, Mid-cap funds, Multi-cap, Index funds, Thematic funds etc. The funds are actively managed or passively managed by its fund manager.

Investing in Equity Funds: Advantages

  • Diversification: Equity Mutual Funds diversify its portfolio for better risk management and more returns. Exposure to a single stock doesn’t exceed 5% for most of the funds.
  • Liquidity: Investment in equity funds are most liquid. The stocks are traded regularly which makes it a highly liquid investment. The unit holder can easily redeem their investment.
  • Tax Benefits: As the investment made in equity funds are tax-free upto Rs.1 lakh if it is more than 1 year period. Equity Mutual funds score a bit over other types of funds.

Balanced funds vs equity funds difference

Mutual Funds Investment Approach

Balanced funds are suitable for an investment horizon of medium to long term period. All balance funds are not the same. The difference comes in the composition of the equity portfolio. The funds with more exposure to mid cap and small cap stocks in their portfolio tend to be volatile when the market falls as it cannot hold its value.

The composition of debt securities also affects the alpha. Debt securities with high credit rating are considered more stable against low rated debt securities.

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In Equity funds, expect Thematic funds all funds are diversified in nature. The funds are classified as growth fund, Value or blend. Those funds which invest in high growth companies with strong sales, cash flow are known as growth fund. The companies command a premium on their share price, High P/E, and Price to book ratio.

Whereas, a fund manager who looks out for high-quality value companies which are trading at discount have good potential for price increase are known as value investing. The funds with dual strategy are known as a blend.

Both these types of mutual funds are suitable for medium to long-term investment horizon. From the table below we can compare the returns of both Balanced Funds and Equity Fund.

returns as on 31st March 2017

Balanced Fund vs Equity fund: Conclusion

Balanced FundsEquity Funds
PortfolioCombination of Debt and equity portfolio with major share of equity.Full exposure to equity stocks.
Risk Factors Risk associated with balanced fund is less. Debt portfolio minimizes the volatility.Higher degree of risk is involved.
TaxationEquity oriented funds are taxed as Equity funds and debt oriented funds comes under the classification of Debt Funds and are taxed accordingly.Long term capital gain upto Rs.1 lakh is Nil. Above that LTCG tax @10% without benefit of indexation. While Short Term Capital Gain are taxed at 15% only.

As discussed above, both types of mutual funds offer a different investment perspective to investors but they share common investment strategy.

Volatility and risk are the main distinguishing factors of both balanced and equity funds. An equity fund can take full benefits of the bull market and also has downside risk during bear phase of the market due to its full exposure in equity segment. Before, investing in the Balanced funds, an investor needs to check for the asset combination and equity profile of the fund.

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Disclaimer: Mutual Funds are subject to market risks. This post is for informational purpose only. It should not be regarded as professional advice in any regard. Please follow due diligence while investing your money in any of the risky asset classes.

Which one do you prefer: Balanced funds or purely equity funds? Feel free to share your opinions.

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