Balanced fund is a form of hybrid fund which aims at providing the investors both income and growth (in terms of capital appreciation). It offers exposure to equities, debt and other asset classes in a pre-set fixed proportion, and hence known as an asset allocation fund. While balanced funds can be the best investment option for a category of investors, it may not be a good option for another. Let us analyse the features of a balanced fund to figure out if it is beneficial for investors.
- Diversification: Balanced Funds provide a low-risk investment avenue by diversifying its portfolio in different securities. For instance, ICICI Balanced Advantage fund has a portfolio of 68% equity, 28% debt and 4% of other instruments. While the equity markets are highly volatile, the diversification provided by debt instruments ensure risk mitigation for the risk-averse investors.
- Income generation: As a considerable share of investment in the debt market (which is a fixed income security), there exists a regular income generation.
- Lower expense ratio: Since the asset allocation is fixed, fund administration costs are minimized, resulting in a comparatively lower expense ratio.
- As these are open-ended funds, investors can withdraw their funds any time when required.
- On an aggregate level, we can see that balanced funds is a good investment option for people expecting good returns at a lower risk. Also, for novice investors balanced funds is a beneficial choice.
- One of the significant drawbacks is that the asset allocation is predetermined. So, the control over the assets reside with the fund manager, and not with the investor. Precisely, the asset allocation ratios may not be aligned with all the investors’ objectives.
- On the similar lines, an investor is not permitted to withdraw funds from only one of the securities. For example, when the macroeconomic conditions do not favour one of the assets (say bonds), an investor is not permitted to withdraw allocation from that asset.
- Although the risk factor is lower than an all-equity fund, the returns generated is also quite lower. So, a balanced fund may not be relevant for an investor who is expecting higher returns.
Walking through this write-up, we could understand that Balanced Funds is a good investment option for portfolio diversification but not for a portfolio optimization.