Mutual fund investment: Get rich with these 5 best balanced funds; 5 steps to big profit

The primary advantage of investing in balanced funds is to achieve diversification.

Balanced funds by definition are geared toward investors who are looking for a mixture of safety, income and modest capital appreciation. For retirees with low risk tolerance, balanced funds are an ideal option since the equity portion of the fund generates inflation-beating returns whereas the bond component acts as an income generator as well as a dampener to the volatility that the equity portion of the fund brings to the portfolio. Capital allocation among different asset class within these funds usually follows a set minimum and maximum exposure limits to preserve the investment objective of these funds.

“Typically balanced funds maintain equity to debt ratio of 60% and 40%. Often making a choice between the available balanced fund options is a tough decision. Investors should always opt for funds which have an optimal allocation between equity and debt. Within the equity component of the balanced fund, it is also important to evaluate the exposure between large caps, midcaps and small caps. Since most of the investors looking to invest in balance funds do not have much of a risk appetite, it is advisable that investors should opt for large-cap oriented balanced funds and avoid schemes with excessive exposure to midcap stocks,” says Rahul Agarwal, Director, Wealth Discovery.

Some of the criteria that should form the basis of your choice while opting for a balanced mutual fund are listed below:

1. Look for the proper asset allocation: The primary advantage of investing in balanced funds is to achieve diversification. So, look for a fund that allocates properly between equity and debts. If your risk appetite is low, it is better to choose funds which do not have more that 65%-70% exposure to equity. Also, in equity allocation, exposure to small and midcaps should be low.

2. Look for a well-managed fund: The fund manager takes care of the asset allocation, as he rebalances the fund on the basis of the investment objective. “It is advisable to scrutinize the past asset allocation history of the fund and evaluate if the asset allocation matches your risk profile. For long-term investors with more than 7 years’ investment horizons, a well-managed fund with higher equity allocation would be a preferred alternative. For short-term investors, funds with more exposure to debt instruments should be preferable,” says Agarwal.

3. Opt for funds with low expense ratios: A mutual fund house incurs annual expenses (such as administrative costs, management fees, etc.) to run its operations. Expense Ratio is the percentage of assets that go towards these expenses. “Generally equity funds have an expense ratio of around 2.5 per cent while debt fund charges around 1.5 per cent. Even if a balanced fund charges you 2.25 per cent as expense ratio, it will be more expensive. Over the long term, as compounding takes place, such small costs matter. Therefore, the expense ratio of a fund should be factored in while making an investment choice,” informs Agarwal.

4. Investment through SIP or Lumpsum: While investing in balanced mutual funds, an investor has an option of going through the systematic investment plan (SIP) or opting for lump sump investment. If an investor has available funds and wants to do a lump sump investment, it is still advisable to go through the SIP route until the entire funds are fully invested. The way to do it would be to invest the investable amount into a short-term debt fund and have a systematic transfer plan into the balanced fund. By doing this the investor not only maximizes his yield, but also gets an averaged down rate for his balanced fund investment. If the market goes down, this strategy is a safe one for balance fund investors who have a low risk tolerance.

5. Do not get lured by regular dividends of a balanced fund: Equity-oriented balance funds have started a new trend in their dividend payout frequency. Funds which were earlier making annual dividend payouts are now offering monthly or quarterly dividend payouts to lure investors. “In our opinion this is an unhealthy practice and it’s unsustainable in the long run because balanced funds are not designed to pay monthly or quarterly dividend payouts. The dividend is paid out from the distributable surplus accumulated over the years; irrespective of the prevailing market situation. Hence, it leads to the reduction in the NAV to the extent of the dividend paid out. Investors need to realize that the dividend they would receive from mutual funds is not an extra return, but their capital being paid back to them,” says Agarwal.

For investors, a regular dividend payout works similar to a systematic withdrawal plan (SWP) from a fund. However, whereas the SWP are custumosiable with a fixed yield, dividend payouts are not supposed to be consistent and are discretionary. Therefore, investors should stay away from these types of funds.

Below are some of balanced schemes that may be a good investment choice for people. However, investors are advised to do their own due diligence before making any investment in these funds.

(Source: Wealth Discovery)

Thus, balanced funds are a great investment option for investors who are looking for a mixture of safety, income and modest capital appreciation. Investors should analyze their risk appetite and time horizon for investment above everything else before making an investment.