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Balancing Risk and Reward: Understanding Balanced Mutual Fund Schemes

Balanced mutual fund schemes help to spread your risk by investing in both stocks and bonds. They are great for investors who want to diversify their investments without investing in multiple assets separately. Read on to find out more about this type of hybrid mutual fund!

What Are Balanced Mutual Funds?

Balanced mutual funds invest in stocks and debt to varying degrees. They are primarily equity-oriented and follow the 40% – 60% fund allocation ratio. So, they can invest 40% in debt and 60% in equities or vice versa.

The Importance of Balance

Risk and Reward are two sides of the same coin in investment. Balanced funds automatically spread your funds across various stocks, minimising your market risk while offering returns.

The equity part of the funds is invested in stocks of large, dividend-paying companies to get high returns, while the debt-oriented assets offer a stable income stream. This helps cushion losses during volatile markets. 

Advantages of Balanced Funds

  • Access to Multiple Asset Classes Within a Fund: Investors can access multiple asset classes like equity, debt, gold, etc., all in one fund without investing in separate funds.
  • Active Risk Management: This is done through active portfolio management and diversification of asset classes. Since your funds are spread across multiple assets, you won’t suffer giant losses during market downturns compared to equity funds.
  • Diversification: Diversification is done across asset classes and within their sub-classes. For example, in equity allocations, the fund will invest in large, mid and small-cap stocks, growth stocks, cyclical stocks, etc.
  • Automatic Rebalancing: Your fund manager will regularly rebalance the portfolio without your intervention. This saves time and energy from tracking and analysing markets as the fund managers do it for you.
  • Perfect for Beginners: Balanced funds are great for new investors skeptical about high-risk, high-reward funds. They allow them to invest in equities while mitigating the risks associated with investing in stocks.

Risks and Challenges

  • Like all investments, balanced funds are not devoid of risk. The risk mainly revolves around how much the fund invests in equities. The higher the equity allocation, the higher the risk.
  • They are not for short-term investors. These funds are suited for 3 to 5-year investment horizons. The longer you invest, the better your returns.
  • The fund manager fully determines the asset allocation. The investor has no say in how the various assets can be managed or combined. This may not be for you if you are a more active investor.
  • Since they are a middle ground between equity and debt mutual funds, the returns will neither be as high as equity funds nor as stable as debt funds.


According to SEBI guidelines, balanced funds must follow a 60% – 40% or 40% – 60% of allocating the funds corpus to debt and equities. This means balanced funds can allocate 40% into equities and 60% into debt or 60% into equities and 40% into debt.

Moreover, depending on the asset allocation, the funds will be taxed according. For example, an equity-heavy fund will be an equity fund where you need to pay 15% for short-term capital gains and 10% for long-term capital gains exceeding ₹1 lakh.

Asset allocation is also entirely up to the fund’s manager. This can be great for new investors who do not know the market well enough but can be a point of contention for experienced or active investors. 

Wrapping Up

Balanced mutual funds offer diversification from the get-go and are perfect for new and mid- to long-term investors. So, if you want in on a low-risk investment opportunity, several trading broker in India offer access to balanced mutual funds.

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