Do balanced funds offer better returns then debt funds?

To invest in mutual funds and earn long term capital appreciation, investors must first prioritize their goals and target these specific goals. To ensure that you invest in the right type of scheme, make sure that the investment objective of the mutual fund aligns with that of yours. Before investing your hard earned money in any type of scheme, financial planning essential. In mutual funds, there are several categories, with every scheme having a different investment objective, investment style, asset allocation strategy, etc. If you are new to mutual funds or investing, please consult a financial advisor before investing your hard earned money.

What are debt funds?

A debt fund is an open ended equity scheme which predominantly invests in fixed income securities and debt instruments to achieve a common investment objective. A debt fund may invest in bonds, government securities, treasury bills, commercial papers, certificate of deposits and various other money market instruments. Debt funds are preferred by those individuals who carry a low risk appetite and wish to earn capital appreciation without exposing their finances to the dangers of volatile markets. Although it is true that the investment portfolio of a debt fund doesn’t get affected by the fluctuations in the equity markets, they are prone to interest rate risk and credit risk.

What are balanced funds?

Balanced funds or hybrid funds are they are commonly referred to as, are equity schemes that invest in both asset classes. Of its total assets, a balanced fund may invest in both equity and debt. Whether a balanced fund will invest more in equity or debt may entire differ depending on the investment objective and investment strategy of that fund. For example, a multiple asset allocation fund must invest minimum 10percent in any three asset class. On the other hand, an aggressive hybrid fund invests majority of its investible corpus in equity while the remaining in debt.

Should you invest in balanced funds or debt funds to target your financial goals?

Before investing your hard earned money in either of the fund, investors should understand that both these mutual fund schemes have different investment objectives. Before deciding whether to invest in debt or balanced funds, let us understand the differences between these two:

Criteria Balanced funds Debt funds
Features Invests in both equity and debt depending on the fund’s investment objective and investment strategy Invests predominantly in debt instruments and fixed income securities
Risk profile Are highly volatile as they invest a portion of their investible corpus in equity markets Are less volatile as compared to equity and hybrid schemes but have risk from interest rate and credit risk
Capital gains Returns are subject to the performance of their underlying assets May not offer high returns, but promise stability
Investment horizon Ideal for investors with a medium to long term investment horizon Ideal for parking your money for the short term
Ideal for Investors who carry high risk appetite and seek long term capital appreciation Investors looking add liquidity to their investment portfolio

For the above comparison, you must have noted that both debt and hybrid funds serve different investment purpose. While hybrid funds aim at providing the right mix of equity and debt, debt funds focus on offering stable income with minimum investment risk. One can invest in balanced funds to target their life’s long term financial goals. On the other hand, debt funds can act as hedge against volatile markets and provide the necessary cushion in falling markets.

If you carry a high risk appetite and wish to invest in a scheme that diversifies its assets in both equity and debt, you can consider investing in hybrid funds. On the hand, debt funds are ideal for short term investment.