Monday, September 22, 2008

Balanced Mutual Funds: Good option when Markets are down

What is a Balanced Fund?

Balanced funds a.k.a. hybrid funds are a type of funds which don't take full exposure either in equity or in debt. They invest in both equity and debt in a well defined ratio as per the fund's mandate. An investor with a low risk capacity and having dependents can use these funds to have stability in his/her portfolio.

They are usually classified in two broad categories:

Equity Oriented Hybrid Funds:

These funds usually invest in the ratio 60:40(equity : debt) or 75:25 (equity : debt). Suitable for investors who want to benefit from the equity market but at the same time would not like to risk his entire money with equities. These funds perform better than equity funds during the downturn in markets and have a better shield in terms of debt component.

In case of a downturn, they increase their debt component to reduce the impact of falling market in the fund's NAV.Similarly during a bull run, these funds will increase their equity exposure to get benefited from the bull run. So a moderate risk investor can choose this fund to have a balanced return.

Debt Oriented balanced Mutual Funds:

These have a big chunk(>70%) of their portfolio in debt instruments. These funds are designed to get returns from debt instruments but have a small portion invested in equities to get that additional kicker return to outpace typical fixed income instruments like bank FDs. In order to get an edge over typical debt instruments and also provide investor an extra bit of return, they have a limited exposure to equities.


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