Owning a diversified investment portfolio with investment options across varying asset classes is always desirable. This is because diversification ijhelps to reduce risks to a huge extent. However, in the quest to diversify the portfolio, an investor often ends up investing in several types of mutual funds. Wouldn’t it be wonderful if you could invest in numerous asset classes through a single fund? Well, you can. Balanced funds help you precisely do the same. This article will focus on why balanced funds are deemed to be a good choice for first time investors. But, first let’s understand what a balanced fund is.
What is balanced fund in mutual funds?
Balanced funds, also referred to as hybrid funds, are a type of mutual funds that comprise of a stock component, a bond component, and, at times, a money market component in a definite ratio in a single portfolio. These mutual funds aid investors in diversifying their portfolio by investing across different asset classes such as debt and equity. Generally, hybrid mutual funds stick to a moderately fixed combination of bonds and stocks.
The main intention of these funds is to balance the risk-reward ratio while simultaneously enhancing the returns. Thus, balanced funds are an excellent option for investors that are looking for wealth creation along with undergoing minimum risk.
Advantages of Balanced Funds
Following are some of the advantages of investing in balanced mutual funds:
- Re-balancing of mutual funds
There are periods when debt markets are overrated as compared to the equity markets and vice versa. In such circumstances, a fund manager has the freedom to spread the investments across the two chief asset classes (equity and debt) and provide a state of balance to the fund’s performance against market fluctuations.
- Risk reduction
Investments in pure equity funds appeal significant risk as the equity markets are very unstable and could collapse blatantly in extreme situations. The debt constituent in hybrid funds helps the investors to weigh out the risk modelled by the equity component.
- Diversification of portfolio
Balanced mutual funds provide diversification in a single mutual fund. This allows fund managers to keep a diversified portfolio with investments spread across varying asset classes. Diversification obliges the dual purpose of offering the potential of capital appreciation along with risk minimisation.
- Acts as shield against inflation
Owing to their exclusive asset allocation mix, wherein the equity component aims to provide significant returns, while the debt component aims to provide steady income and relative safety to the portfolio. Thus, hybrid mutual funds act as a hedge against inflation.
Balanced funds have gained massive popularity in the past few years as they offer the best of both worlds – equity and debt. The strategic philosophy behind balanced funds is asset allocation and diversification. Most investors invest in balanced funds with an intent to create wealth via equity allocation and to mitigate the volatility via debt component. If you are new to the world of investing, opting for balanced funds can be the preliminary point of your mutual fund investment journey. Happy Investing!