In the previous few videos we discussed about debt funds and equity funds. We saw that debt funds primarily invest in debt instruments, while equity funds primarily invest in stocks. In this video, we will have a look at balanced funds, the balanced funds which have named the power of equity and as well as the prudence of that. Ideally, balanced funds should be investing 50% in equities and 50% in debt. However, in reality in India at least, balanced funds typically have 50 to 70% of their portfolio invested in stocks and the remainder in bonds and debt instruments. Now, balanced funds are also known as hybrid funds.
But this is not entirely true because hybrid funds are funds which invest in various kinds of instruments. So balanced fund is actually one type of hybrid fund. In India we see that balanced funds are Actually no better term does equity oriented hybrid funds. Balanced funds are very good option for intermediate term investors. This is because the balanced fund balances the risk reward ratio and also ensures that there is a return from this investment. There is the word ratio is balanced between taking a risk in the equities while mitigating the risk from debt instruments.
So, that's why balance bonds are very good investment options for the people who are looking for intermediate term returns. We take a look at one example of a balanced fund. Look at the holding pattern here 51% is in equities where 24% is in debt and 25% is in others. If you see the category allocation of category of asset allocations, you see that there are equity foreign equities in which it is invested like large scapular says multicasts etc. There are also sectoral investments like in technology, pharma, etc. There are debt instruments, where they have invested in medium to long term debt, smart money markets, dynamic bonds, corporate bonds etc.
And also they have invested in commodities like gold. Look at some advantages of the balance. The balance bonds are very well diversified. This is because they invest both in equities and bonds. So, they're very well diversified. And as a result of this diversification they offer comparatively very reduced risk.
The risk reduction percentage is very high in balanced fund. Now, balanced funds are very ideal for people who are close to retirement or are retired. Now one of the biggest advantage of balanced fund is that they offer a monthly income that is easy Invest in a balanced fund we can get a monthly income. Typically a fund like HDFC balance advantage fund gives close to 1%. Return every month, which amounts to about 12.36% returns per annum. Balanced funds also have some disadvantages.
One of the main disadvantage of balanced fund is that the fees associated with balanced funds are normally very high compared to other mutual funds. This is because the fund managers have to balance between debt and equity instruments and have to focus on both tribal instruments and find the right balance to get a return. So the fees charged or balanced funds are normally higher than what is charged for other mutual funds. The second biggest disadvantage of a balanced fund is that the balanced funds cannot be used for tax saving. So if a person is investing in mutual funds for tax saving purpose, by funds are not for them because the balanced fund offers no tax savings. The third disadvantage is that the balanced funds are not risk free.
Only thing is they are less volatile as compared to other mutual funds, but they are not risk free. Thank you for watching. See you in the next lecture.