With markets volatile, balanced funds could be the flavour of the season

• Balanced funds include a combination of bonds (debt) and stocks (equity) in a particular ratio within a single investment portfolio.
  
• Balanced funds are important in a bull market as they allocate a portion of their assets to debt securities.
  
• Look at funds that have been there for 5 years and invest in a fund that belongs to the top quartile, advice experts.
  

The Indian markets have been in a bull run since the start of the current financial year in April. The Nifty50 which was below the 17,000 mark in March end has rallied to a touching distance of 20,000 in less than four months. However, the past few days have seen volatility and a resultant slip following global cues.

The India Volatility Index (VIX) has been steadily rising in the past month. The market volatility barometer jumped 6% to 10.86 levels on Wednesday and has been holding steady there.

In such a scenario, balanced funds, also known as hybrid funds, become attractive for investors. Balanced funds, as the name suggests, comprise a mutual fund category that includes a combination of bonds (debt) and stocks (equity) in a particular ratio within a single investment portfolio. These funds assist investors in diversifying their holdings by investing in various asset classes, such as equity and debt. Typically, balanced funds maintain a fixed blend of bonds and stocks.

“Balanced funds or hybrid funds are a very good option because you are not investing 100% into the markets. Let's say you are investing 65% into the market while 35% is into debt,” says Kunal Jain, senior consultant, Alpha Capital, an investment management firm.

Classifying balanced funds

Balanced funds can broadly be of two types based on their asset allocation. Equity-oriented balanced funds invest a minimum of 65% of their total assets in equity and equity-related securities. The remaining portion of their corpus is allocated to debt instruments or even money market investments, aiming to provide stability and mitigate risks during periods of market volatility. These are meant for aggressive investors with a higher risk appetite.

Debt-oriented balanced funds allocate a minimum of 65% of their total assets to debt securities. Additionally, a portion of the fund may be invested in cash and cash equivalents to provide liquidity. This investment strategy aims to focus primarily on generating income and capital preservation through the fixed-income portion, while maintaining some liquidity to meet potential redemption requirements. By combining debt instruments and cash equivalents, debt-oriented balanced funds aim to offer a balanced approach, providing stability and potential returns for investors with a more conservative risk appetite.

Why balanced funds make sense in this environment

Balanced funds are important in a bull market as they provide a balanced approach to investing by allocating a portion of their assets to debt securities. This helps manage risk and preserve capital during market upswings, reducing portfolio volatility.

Investors can benefit from market growth while having some protection against potential market corrections and be protected from the vagaries of the market.

“When markets are volatile and an investor doesn't have an advisor to help manage volatilities. It makes good sense to invest in balanced funds for any person at this time, but if you are a DIY investor, this is the best choice,” says Renu Maheswari, co-founder and principal advisor, Finscholarz Wealth Managers.

All weather funds – how to pick

Balanced funds are a good option not just now, when markets are near their all time high. “Balanced advantage funds are good for all times-like now when the markets are doing very well or for times when the markets are performing badly,” says Dhirendra Kumar, CEO, Value Research.

When choosing a balanced fund, consider factors like the fund's historical performance, asset allocation strategy, expense ratio, fund manager's expertise, and the fund's investment objective. Assess your risk tolerance and investment goals to select a fund that aligns with your financial needs.

“Investors should look at funds that have been there for 5 years and invest in a fund that belongs to the top quartile. They should have given good returns when markets have done well and not performed too badly when the markets have not done well, as they are geared to do,” says Kumar.

Like any other mutual fund that has an equity exposure, the basic condition of investing in balanced funds is having a time horizon of 4-5 years. “If you do not have that kind of time horizon, then do not invest in balanced funds,” says Jain.

Balanced funds thus offer a prudent investment option when markets are near an all-time high. Their diversified approach combining equities and debt can help manage risk during market peaks.