Are Balance Funds Risk Free?

Are Balance Funds Risk Free?

An individual’s financial goal plays a vital part in his or her financial planning. There are short term goals and then there are long term goals. To meet these goals, an individual should have some cash in hand which he or she can invest in certain investment scheme with the hope of making some gains in the long run. The smart way to invest is by diversifying the allocation of assets so that the risk and returns ratio remains in proportion to your goals, investment horizon and risk appetite.
Mutual funds are one of the investment tools that have gained popularity among investors of all age groups. These professionally managed funds give people an opportunity to get the taste of the equity market while offering diversification at the same time. That’s because what mutual fund houses do is that they collect money from investors sharing a common investment objective and invest this pool of funds across the Indian economy including stocks and other marketable securities like G-sec, corporate bonds, commercial papers, treasury bills, etc. The investment objective of a mutual fund is to make capital gains and the fund managers apply an investment strategy to buy / sell securities in accordance with the same.
Today we are going to discuss balanced funds and whether investing in these mutual funds is completely risk-free.
What are balanced funds?
Mutual funds are further categorized based on their unique attributes like asset allocation, risk profile, fund size, investment strategy, etc. Balanced funds or hybrid mutual funds are unique funds which invest in both equity and debt instruments. A balanced fund invests 65 to 80 per cent in equity and equity related instruments and 20 to 35 per cent in debt securities. These are usually opted by investors seeking capital appreciation and also wanting to balance risk at the same time.
Are balanced funds risk-free?
The beauty of a balanced fund is that they hold the power of rebalancing your investments which is not done by pure equity or a pure debt fund. For example, suppose you invest Rs. 100 in a balanced fund and the fund invests 60 / 40 per cent in equity and debt respectively. Now if the equity markets are on the rise, this will lead to an increase in the equity investment of your balanced fund. But at the same time, the asset allocation to your debt investment will remain the same. This will result to change in allocation since equity is performing and debt market isn’t, but a balanced fund does the job of rebalancing your asset allocation, thus benefiting the investor.
Over the last ten years, balanced funds have given average returns of 10 to 12 per cent to investors. So, a balanced fund may offer rebalancing but that doesn’t mean it is completely risk-free. Let’s take the example of the ongoing COVID-19 pandemic that has had an adverse effect on both equity and debt. In such cases, a balanced fund may not be able to live up to its expectations and there are chances that you may even lose out on your initial investment. Hence, we cannot say that investing in balanced funds is entirely safe and hence, investors are expected to understand their risk tolerance and invest only if that can sustain losses.
Having said that, no investment is considered to be risk-free and hence, individuals who are new to investing and mutual funds, in general, must do some basic research like finding out about the past performance of the fund, whether the fund has been consisting with providing returns, how the fund is performing as compared to its peers, etc. These analyses might help investors in picking up the apt mutual fund to meet their financial goals.

Leave a Reply

Your email address will not be published. Required fields are marked *

twenty eight − = 19