Fund Intro #2: Balanced Funds- Safety of a balanced portfolio with tax benefits of equities

Posted By : Kushal Kothari

There are broadly two asset classes - Equity which is risky but is the source of all growth and Debt, which provides investors with safe returns and surety of payback. Most of us invest in both the asset classes. Sure, you think you have SIPs only in Equity schemes, but don't you have that FD in a big bank, savings in PPF and surplus cash is savings account? After all, these are nothing but debt investments with just a different name. Balanced fund (Equity Oriented) is a type of mutual fund that invests both in Equity and Debt instruments, with a minimum allocation of 65% for equities and the rest in bonds, money market and other debt instruments. Before we proceed to talk specifically about Balanced funds, let's talk about tax for a minute. 

Did you know 1: Equity investments are tax-free after one year of holding period?

Yep. It is true. We are not talking just about the once a year sort of investments in ELSS. All equity stocks and mutual funds are free of capital gain tax if held for more than one year

Did you know 2: Interest on FDs, savings account, all kinds of debt mutual funds (including liquid ones) are all subject to tax on interest accrued/paid out?

Unless explicitly stated (as in the case of PPF, up to a certain limit), all debt instruments attract tax. In the case of debt mutual funds, they turn tax efficient if held for more than three years unlike equities, which are tax-free after just one year of holding. We'll talk a whole lot more about taxation in a different article, but this is enough as far as understanding the advantages of balanced funds is concerned.

Do I hear you ask why all this taxation stuff is important? Well, because one of the biggest advantages of balanced funds is their tax treatment! Even though they hold up to 35% in debt, they get taxed as though they are equities. That is if you hold them for a year, all gains from these schemes are tax-free!


For example: If you are holding ₹650 in Equity mutual funds and ₹350 in Debt mutual funds, the debt component will be taxed no matter when you redeem it. However, if you invest ₹1000 in Balanced Fund, all the returns are completely free of taxation after 1 year of holding. Pretty great isn't it?


Balanced Funds (Equity Oriented)

What are they? Funds that invest in both Equity and Debt instruments, with at least 65% investment in Equities.

USP? Get a risk-managed investment portfolio with debt in the mix, yet with all the tax benefits of equities!

Where do they invest? Usually, these funds don't have a strict mandate with regard to kind of stocks they invest in, except to maintain an Equity allocation of at least 65%. 

Why should you invest? When markets are running high, the fund manager switches from equity to debt. During a downturn, the manager sells debt to buy equities to manage the asset allocation. This reduces the volatility of returns with only moderate upside and downside risks. Oh! Also because there is no capital gain tax after one year. 

Who should consider investing? Anyone looking to add debt to their portfolio in a tax-efficient manner or those looking to have a managed exposure to equities


Hope this helps.


Happy Investing!