Which One Is Best for You
Equity Mutual Funds are mutual funds which invest its total asset in
equity stocks. The fund’s main objective is capital appreciation from the
investment. Investing in Equity funds involves a higher degree of risk to
volatility. Whereas Balanced Funds are the category of mutual funds which
invests in a mix of stocks and bonds. The fund is designed to provide investors
with modest capital appreciation and provide safety from volatility.
Let us understand the comparative investment value and situational
viability in both instruments.
The Balanced Fund
§ Bifurcated into 2
categories, the balanced fund is equity oriented or debt oriented in how it
works.
§ The Equity mutual funds has a larger stock in the
portfolio at around 60-80%. Whereas the remaining is debt securities.
§
The investment in equity is done as per the investment objective of the
fund which can be a mix of multi-cap, large cap or midcap stocks.
Advantages
Stable return: The mutual fund returns from the portfolio of
bond and equities are not positively correlated. Bond prices are not affected
by volatility in the market. Owing to a balanced asset platform, the benefits
from balanced funds are stable compared to equity funds
Low Risk: The balanced fund is a mixture of debt and equity.
Making it low on the risk factors with less of volatility in comparison to
equity fund.
Tax efficiency: Having an equity portfolio of more than 65%
of asset allows it to enjoy the tax benefits. After the investment period of
one year, the gains are tax-free. For debt oriented, short term gains are taxed
at 10% till 3 years and investment more than 3 years are considered, it is
taxed at 20%, after the benefits of indexation
More on it:
·
Are suitable for an investment horizon of medium to long term period.
·
All balance funds are not the same. The difference comes in the
composition of the equity portfolio.
·
The funds with more exposure to mid-cap and small cap stocks in their
portfolio tend to be volatile when the market falls as it cannot hold its
value.
·
The composition of debt securities also affects the alpha. Debt
securities with high credit rating are considered more stable against low rated
debt securities.
An Equity Fund
§ There are
wide range of equity mutual funds available to investors.
§ They are
categorized according to market cap, sector, geography etc. Most popular type
of funds are Large-cap Funds, Mid-cap funds, Multi-cap, Index funds, Thematic
funds etc.
§ The funds are
actively managed or passively managed by its fund manager.
Equity Fund Pros
Diversification: Equity Mutual Funds diversify its portfolio
for better risk management and promise more mutual
fund returns. Exposure to a single stock doesn’t exceed 5% for most
of the fund
Liquidity: Investment in equity funds are most liquid. The
stocks are traded regularly which makes it a highly liquid investment. The unit
holder can easily redeem their investment.
Tax Benefits: As the investment made in equity funds are
tax-free if it is more than a 1-year period. Equity Mutual funds score over
other types of funds.
More On It:
·
Except Thematic funds all funds are diversified in nature.
·
The funds are classified as growth fund, Value or blend.
·
Those funds which invest in high growth companies with strong sales,
cash flow are known as growth fund.
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BALANCED
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EQUITY
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Portfolio
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Culmination of Debt and equity instrument
with a dominance of equity
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Complete exposure to equity stocks
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Risk
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Risk is less. Debt portfolio reduces
volatility
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More of risk
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Tax
|
Equity oriented funds are taxable as Equity
funds and debt-oriented funds are placed under Debt Funds category for
taxation.
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Long term capital gain tax is none while
Short-Term Capital Gain has 15% taxation.
|
As discussed
above, both types of funds offer a different investment perspective to
investors but they share a common investment strategy. The primary factors that
differentiate between the instruments are risk and volatility. The equity fund absorbs
full benefits of the bull market and also mitigates pitfalls during the bear
phase of the market, owing to its intense exposure in equity segment. Remember
to understand the asset combination and equity profile of the fund before you put
money into the balanced fund.
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