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 minimized if planned thoroughly. Mutual funds are divided into balanced funds, debt funds, and equity funds as per their risk factor.

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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.

Balanced Funds

Balanced funds are also known as hybrid funds. Such funds allow investors to invest in both debt or 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 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.

Comparative Analysis of Balanced Funds and Debt Funds 

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

Balanced Funds

Debt Funds

Returns: Whenever we want to make an investment, the first thing we consider is the return that will be yielded on the investment.

Balanced funds yield more returns when compared with debt funds but lower than what equity funds would yield. 

This is because returns of the balanced funds are dependent upon the ratio asset distribution among debt and equity funds. 

Further, the risk factor of the debt and equity funds and the volatile nature of the market also impacts the returns.

Because of their investment into fixed-income instruments, debt funds allow investors to yield small but stable returns throughout the term period. 

However, returns yielded by debt funds are significantly lower when compared with the equity and balanced funds.

Risk factor

The risk factor in balanced funds is connected to the asset division. 

If the assets are divided conservatively, i.e., invested in debt security, government backed instruments, and a smaller portion of assets are invested in money-making instruments, the risk factor remains very low. 

If the asset allocation is done aggressively, i.e., majority assets are invested in money-making instruments and small portion is invested in debt security, increasing the risk factor.

Debt funds, though, have security on capital, but they are not completely risk-free. Debt funds carry credit and interest risk. 

Credit risk is related to securities with low credit ratings, and interest risk arises when the government or other designated entities slash interest rates.

Taxation: Debt funds and balanced funds have different taxation rules.

For balanced funds, taxation rules will vary as per the portfolio. The Income Tax Act has provisions for equity and debt funds. 

If your asset allocation is aggressive or equity-related, then 15% tax will be levied on the investment withdrawals before one year of investment. 

If the asset allocation is conservative, i.e., more than 65% of the investment is in debt-related securities, it will be treated as debt investment and taxed as per the debt funds rules.

Taxation for debt funds is dependent upon the holding period of the funds. If you withdraw from your fund investment three years before the maturation period, that withdrawal will be counted as your income. 

Therefore, it will be subject to tax slab as per your income status. If you let go of the funds after three years, then 20% tax will be levied upon the returns you get.

Liquidity

Balanced funds are not liquid because of equity allocation. However, you can buy and sell units as per your wishes, but there is a chance that you might incur a significant loss.

Debt funds have better liquidity. You can withdraw or sell the funds at your convenience. These funds are better for short-term investment. You can buy and sell them on a short-term basis without incurring a significant loss.

Who Can Invest In Balanced Funds?

Balanced funds are ideal for people who wish to safely invest their capital and earn small to medium returns. Investors who have extensive knowledge of the market and its workings can allot their assets as they seem fit. 

If you have a risk appetite, you can opt for aggressive investment and yield better returns or opt for conservative investment. As per the investment guidelines, you are not allowed to invest more than 65% in equity funds.

Who Can Invest In Debt Funds? 

Debt funds are ideal for beginners and investors with a low-risk appetite. You can choose to invest in diverse government securities, debentures, or corporate bonds to ensure low to medium returns for you. Usually, debt funds are open-ended short-term funds. 

Debt funds are further classified as follows: 

  • Short-term funds: Short-term funds have a maturity period from 3 months to 12 months. If you have ideal money and are looking for safe investments, then debt funds are the best option. You can yield up to 7-9% returns on your investment without risking your capital as well as liquidity. 

  • Medium-term funds: Medium-term funds have a maturity of up to 3 years to 5 years. If you choose to invest in medium-term investment funds, you yield better returns than what you would otherwise get if you invest in a fixed deposit. Also, medium-term funds allow you to opt for a monthly income plan that will give you small amounts of liquidity on your funds. 

In Conclusion

At a glance 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 analyze and understand your financial goals. Draw out the investment plan as per your suitability.

You must always look for your investment horizon and carefully analyze your needs and requirements before making any investment-related decision.

FAQ's

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

    Ans: 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.
  • Q. What is the correlation between risk and the return in investments?

    Ans: 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.
  • Q. Can I change my investment strategy after I start investing?

    Ans: 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.
  • Q. What are the regular plans and direct plans in mutual funds? 

    Ans: 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 any distributor. In a regular plan, the investor makes an investment through the distributor, broker, or banker. AMC pays these intermediaries distributor fees as per the investment plan.
  • Q. How can I make payments to the mutual funds? 

    Ans: 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, annually, or lump sum payments. To make the payments, you can write outdated cheques or employ debit facilities from the banks. You can also make payments through the NACH (National Automated Clearing House).
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