Balanced Fund vs. Debt Funds

Mutual funds get better returns than any other investment instrument. Even though mutual funds are subject to market risk, their risk factor can be minimised if planned thoroughly. Mutual funds are divided into balanced funds, debt funds, and equity funds as per their risk factor. The balanced and debt funds are the preferred investment choices owing to their low-risk feature. Under each category, you have different risk profiles and portfolios to achieve your financial goals.

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Balanced Funds

Balanced funds are also known as hybrid funds. Such funds allow investors to invest in both debt and equity funds. Depending on your risk appetite and financial goal, you can invest in debt and equity funds in similar or dissimilar proportions. Balanced funds have a medium risk factor due to market volatility. However, they assure a certain guarantee on credit because of their balanced or hybrid nature.

Debt Funds

Debt funds are the low-risk instruments that allow investors to yield returns by investing in government securities, corporate bonds, and debentures. These instruments usually have an attached fixed income that restricts generating more than fixed returns on your capital. However, you will have a capital guarantee. Most beginners prefer to invest in debt funds because of the government's guarantee. Risk tolerance defines the best SIP investment strategy.

Comparative Analysis of Balanced Funds and Debt Funds 

Balanced and debt funds both guarantee and mitigate the risk on the capital that you will be investing. The following is the detailed comparative analysis:

Basis Balanced Funds Debt Funds
Core Investment Strategy These are hybrid funds that combine Equity and Debt. They aim for wealth growth through stocks while using bonds to cushion against market crashes. These invest strictly in Fixed-Income Securities like government bonds, corporate debentures, and treasury bills. Their goal is capital preservation and steady interest income
Asset Allocation Maintain a combined portfolio of equity and debt. Some dynamic versions can shift these ratios based on market conditions. Investment and taxed as per the debt funds rules. Invest almost exclusively in fixed-income instruments like Government Securities (G-Secs), corporate bonds, and treasury bills.
Return Potential Offer higher potential returns because of the equity exposure. Offer stable but lower returns, usually aiming to slightly outperform bank fixed deposits.
Ideal Investment Horizon Best for medium-to-long-term goals like saving for a home down payment or a child’s education. Ideal for short-to-medium-term goals such as an emergency fund or a vacation budget.

Who Can Invest In Balanced Funds?

Balanced Hybrid Funds must maintain a strict 40% to 60% equity range. They are not allowed to use arbitrage to bypass this. If you want a higher equity exposure (65%–80%), you must look at Aggressive Hybrid Funds. Balanced funds are actually designed for moderate to high long-term returns, not just "small" returns.

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Returns
Fund Name 5 Years 7 Years 10 Years
Equity Pension SBI Life
Rating
 12.41% 13.9%
14.39%
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Opportunities Fund HDFC Life
Rating
 19.5% 16.95%
15.9%
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High Growth Fund Axis Max Life
Rating
 29.43% 23.7%
18.4%
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US Growth Fund ICICI Prudential Life
Rating
 15.25% -
18.03%
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Multi Cap Fund Tata AIA Life
Rating
 29% 23.3%
22.22%
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Accelerator Mid-Cap Fund II Bajaj Life
Rating
 15.37% 15.16%
15.71%
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Multiplier Birla Sun Life
Rating
 19.5% 17.42%
15.9%
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Pension Mid Cap Fund PNB MetLife
Rating
 31.41% 24.68%
18.41%
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Equity II Fund Canara HSBC Life
Rating
 11.09% 11.98%
12.66%
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US Equity Fund Star Union Dai-ichi Life
Rating
 14.54% -
14.6%
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Fund rating powered by
Last updated: Jan 2026
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Fund Name AUM Return 3 Years Return 5 Years Return 10 Years Minimum Investment Return Since Launch
Motilal Oswal BSE Enhanced Value Index Fund Regular - Growth ₹822.00 Crs 35.31% N/A N/A ₹500 35.07%
Bandhan Small Cap Fund Regular-Growth ₹14,062.19 Crs 29.34% 30.26% N/A ₹1,000 31.59%
Motilal Oswal Midcap Fund Regular-Growth ₹33,608.53 Crs 25.97% 33.24% 17.66% ₹500 22.31%
ICICI Prudential Infrastructure Fund-Growth ₹7,941.20 Crs 28.79% 37.23% 17.14% ₹5,000 15.97%
Canara Robeco Large Cap Fund Regular-Growth ₹16,406.92 Crs 16.08% 17.34% 13.87% ₹100 12.99%
Mirae Asset Large Cap Fund Direct- Growth ₹39,975.32 Crs 14.85% 17.48% 14.46% ₹5,000 16.26%
Kotak Midcap Fund Regular-Growth ₹57,375.20 Crs 22.42% 27.51% 18.07% ₹100 15.26%
SBI Small Cap Fund-Growth ₹35,562.96 Crs 13.89% 23.99% 18.17% ₹5,000 19.25%
SBI Gold ETF ₹8,810.86 Crs 31.81% 17.85% 15.14% ₹5,000 12.57%

Updated as of Jan 2026

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Who Can Invest In Debt Funds? 

While yields have improved in 2026, no debt fund is risk-free. They carry Interest Rate Risk (IRR) and Credit Risk. If interest rates rise, the capital value (NAV) can drop. Additionally, a return of 9% is currently at the very high end, whereas safe Liquid or Overnight funds are closer to 6.5%–7.2%

Debt funds are further classified as follows: 

  1. Short-term funds 

    Short Duration Funds are open-ended debt schemes that invest in instruments such that the Macaulay duration of the portfolio is between one and three years, making them distinct from Low Duration Funds, which target a shorter 6–12 month window. In the current 2026 market, these funds typically aim for stable returns ranging from 6.5% to 8.5% by investing in high-quality corporate bonds and government securities, though they remain subject to interest rate and credit risks.

  2. Medium-term funds 

    Medium Duration Funds are designed to invest in debt and money market instruments with a duration of three to four years, positioning them as a midpoint between short-term stability and long-term growth. These funds generally offer higher yield potential, often reaching 7.0% to 8.5%, as they capitalise on higher-interest coupons from longer-dated bonds. They are an ideal choice for investors with a 3–4 year time..

Conclusion

Investing in either debt or balanced funds seems like a viable option. Both funds yield a steady income and are not high-risk for your capital. However, you are advised to analyse and understand your financial goals before choosing the right mutual fund for your portfolio. Draw out the investment plan as per your suitability. You must always look for your investment horizon and carefully analyse your needs and requirements before making any investment-related decision.

FAQs

  • Does an investor need a bank account for investing in mutual funds?

    Yes, before making any investment, you need to have a valid bank account with updated KYC and PAN details. This is mandated by governing bodies to stop malpractices like money laundering and other such illegal activities and to protect the capital of genuine investors.

  • What is the correlation between risk and the return in investments?

    The risk factor in investment usually refers to the loss of capital or the fall in capital value. This can be caused by many factors, such as the loss of credit or the revised interest rates by the government. Debt and balanced funds have a risk level of medium to low, which means the return could be low. But the chances of you losing your capital are also low. In terms of equity funds, the risk factor is higher, which means you get better returns, but the chances of losing the capital are also higher.

  • Can I change my investment strategy after I start investing?

    It is one of the best things about mutual funds that allows you to be flexible about your investment amount as well as the tenure for which you are investing. Most mutual funds are open-ended. It means that they don't have a lock-in period, so you can sell your unit whenever you desire. However, it may attract taxation on your income.

  • What are the regular plans and direct plans in mutual funds? 

    All mutual funds come in two categories - direct plan and regular plan. In a direct plan, you can make a direct investment in the funds without a distributor. In a regular plan, the investor invests in the distributor, broker, or banker. AMC pays these intermediaries distributor fees as per the investment plan.

  • How can I make payments to the mutual funds? 

    Mutual funds let investors choose the frequency through which they desire to make the payments and the tenure for which they wish to invest. You can choose from daily, weekly, monthly, annual, or lump sum payments. To make the payments, you can write outdated cheques or use debit facilities from the banks. You can also make payments through the NACH (National Automated Clearing House).

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
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˜The insurers/plans mentioned are arranged in order of highest to lowest first year premium (sum of individual single premium and individual non-single premium) offered by Policybazaar’s insurer partners offering life insurance investment plans on our platform, as per ‘first year premium of life insurers as at 31.03.2025 report’ published by IRDAI. Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. For complete list of insurers in India refer to the IRDAI website www.irdai.gov.in
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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