A low risk profile, and a desire to create wealth

Conservative investors stand to gain with their investment in hybrid or balanced funds, as this article explains.

Every investor wishes to make a high margin of profit on the investment option they choose. But every investor has a varying outcome from their portfolio, and the primary reason for this variance is their risk appetite.

While some investors are willing to ‘play the markets’ and ride out market fluctuations to get higher gains, others might be more conservative in their approach. This latter class of investors would certainly like to get good returns, but they also wish for minimal risk on their investment. Balanced mutual funds, or hybrid funds, are a better fit for them. In terms of behavioural psychology, these funds are beneficial to those who are likely to panic the most when the markets plunge – they would prefer lower returns in untroubling intervals, than get high returns accompanied by massive fluctuations.

Balanced mutual funds own both stocks (equities) and bonds (debt), for investors who would like good returns, but who wish to avoid volatility when the markets plunge. However, they may not gain as much out of a hybrid fund when the markets are bullish, as others might purely from equity funds. An important consideration is that they hold their value when stocks fall.

Here’s looking at how hybrid funds work and how they benefit you:

Who needs balanced mutual funds? Investors who are risk averse, and who wish for stable, assured returns with modest capital appreciation.

What do balanced mutual funds normally comprise? Most funds in this category comprise a mix of equity and debt funds. The equity funds offer higher returns with relatively higher risk, while debt funds offer relatively lower returns with a lower risk propensity. Thus, they ‘balance’ each other out and offer good returns while minimising risk.

Some more features about this class of funds: Leading fund houses in India offer the best options in balanced mutual funds. These comprise, but are not limited to, open ended dynamic asset allocation funds investing in debt, equity, arbitrage and gold instruments. Also, since this fund rarely changes its stocks and bonds over its life cycle, the operational costs on it are comparatively less.

Tax benefits of these funds: They offer stability by protecting you from inflation, and also offer tax benefits. At least 65% of the balanced mutual fund is invested in shares, so they are viewed as equity funds for taxation purposes. Even the debt component of the fund is viewed as ‘equity’. Accordingly, you are not charged capital gains tax if you stay invested for at least one year, and the dividends on the fund are also tax-free. This feature increases the appreciation potential of the fund.

Leading fund houses in India offer up to five different options in hybrid funds. Your fund manager can shed more light on the kind of fund you need to choose depending on your investment strategy and goals.