Balanced Funds vs Equity Funds: Which is Best for You?

When it comes to financial investments in India, balanced funds are steadily making a mark, with reports highlighting how they have seen a 37% growth in recent years. In comparison, pure equity funds grew by 23% in the country. This clearly indicates a coming-of-age moment as far as balanced funds are concerned. Balanced funds are becoming a popular investment option for a large chunk of investors. At the same time, there’s no denying the appeal of pure equity funds too.

So, which one should you choose as far as your investment allocation strategy goes? Let us look at both these fund types in more detail, including their key features and differences to help you decide.

Understanding Balanced Funds

Balanced funds, also known as Hybrid funds, invest in both equity and debt in specific ratios. Investors can diversify their portfolios with the help of these funds, which maintain a balance between both risk and rewards.

Some of their key features are:

• Hybrid funds ensure optimized returns, with 40-60% of the portfolio usually comprising equity and the remainder in safer market instruments.
• These funds aim at assured appreciation in capital and offer higher safety against potential market risks.
• They are ideal for investors with lower risk tolerance, especially since fund managers can adjust portfolio allocations based on changing market conditions. Investor portfolios are often automatically rebalanced in case of extreme market volatility.
• They contain debt assets that hedge against inflation in many cases. For example, some may include international bonds that safeguard investors by diversifying to countries that are not as impacted by inflation.
• The bond components in these investments may help you earn a steady income through interest payouts.

Understanding Equity Funds

Pure equity funds invest in shares of companies to generate returns for the investors. Investments may be deployed in companies with different market capitalizations and across diverse sectors/areas of operation.

Here are some of their key features.

• Pure equity funds have the potential to generate the best possible returns compared to other market instruments.
• However, they are the most volatility and risky, with their performance being hugely impacted by changing market conditions.
• Equity funds have to be selected based on the risk profile and future goals of the investor.
• Some plans like ELSS (equity-linked savings scheme) offer tax deductions up to Rs. 1.5 lakh under Section 80C for investors. However, bear in mind that these investments have lock-in periods of three years, unlike other equity funds which have better liquidity.
• These funds are professionally managed like balanced funds, although their expense ratio is often higher in comparison.

Now that you have a basic understanding of both these fund types, it’s time to look at a brief comparison between them.

Balanced Funds vs. Pure Equity Funds

Here’s a brief comparison of balanced funds and pure equity funds for your understanding.

Feature	Hybrid Mutual Funds	Pure Equity Funds
Asset Composition	Mix of equities and bonds	Only equities
Risk Level	Moderate	High
Return Potential	Moderate	High
Income Generation	Yes (from bonds)	No
Volatility	Lower than pure equity funds	High
Investment Horizon	Suitable for medium to long-term	Suitable for long term
Diversification	High (due to mixed assets)	Depends on fund type
Management Style	Can be actively or passively managed	Can be actively or passively managed
Investor Suitability	Conservative to moderate investors	Aggressive investors

 

Which One is Better for You?

If you’ve closely looked at the differences mentioned above, then you’ll know that both funds have their fair share of pros and cons. What is best for you will naturally depend on your own financial circumstances, risk profile, and future goals.

Here’s when a pure equity investment may be better for you:

• You are young and just starting off in your career without any financial commitments or responsibilities. In this case, you can invest majorly in equities before shifting more towards debt or balanced funds as you grow older and have more responsibilities.
• You are an aggressive investor who is comfortable with risks and can stay invested for the long term despite market volatility and temporary losses.

Here’s when a balanced fund investment may be better for you:

• You are majorly a conservative or risk-averse investor. Or perhaps you have financial obligations and commitments to meet, meaning that you cannot risk losing money.
• You’re looking for portfolio diversification and a better mix of equity and debt.
• You are comfortable with moderate returns as long as the risks are on the lower side.

You should only take a call after analyzing your situation and future goals closely.

In this context, there’s also a third path that you can consider- ULIPs (unit-linked insurance plans). They are hybrid life insurance plans with the dual benefit of life cover and market linked investments. With ULIPs, you can invest in your preferred mix/allocation of equity, debt, and balanced funds and change the allocation periodically in response to changing market conditions or life goals. You will also get tax deductions on the amount invested under Section 80C (up to Rs. 1.5 lakh yearly).

Moreover, if the total premiums paid in a year are less than Rs. 2.5 lakh, then the maturity amount is also tax free under Section 10(10D). Overall, ULIPs are a great investment choice that

give you the flexibility to choose and tweak your investments, earning good returns over the long term.

Conclusion

To sum up, pure equity and balanced funds are both compelling choices for very different kinds of investors. Once you figure out your needs and preferences as an investor, making a choice will automatically become easier. Make sure you research thoroughly and consider your risk tolerance and financial goals before making a final decision. You can also take professional guidance if required

 

Aastha Mestry - Portfolio Manager 

An Author and a Full-Time Portfolio Manager, Aastha has 6 years of experience working in the Insurance Industry with businesses globally. With a profound interest in traveling, Aastha also loves to blog in her free time.