Do you also want to explore the concepts of Mutual funds to find new investment opportunities? You can be surprised when you hear about various types of mutual funds; most of them can confuse you. Sometimes it can be challenging to identify which mutual fund is the right choice because you do not have much idea about that fund. In this article, we will know the difference between a balanced fund vs equity fund. Here you will also learn about the advantages and disadvantages of both types of funds to analyze which type of mutual fund can be profitable for you.
What is Balanced Fund?
Balanced Fund is the type or category of Mutual Funds, and it typically includes the portions of stock and bonds. Balanced funds are also popular as hybrid funds or hybrid mutual funds. These funds are specially designed for those investors who want to get modest appreciation in their capital or investment with significant safety layers. Also, the funds get divided into two portions such as equity-oriented and debt-oriented funds.
In most cases, the equity-oriented funds have more stocks in the investor’s portfolio, ranging from 65% to 80%, remaining for debt-oriented securities. The equity investment is performed as per market standard to get a good return, and it can be mixed up with mid-cap, large-cap, and multi-cap stocks. And the rest of the available asset gets invested in the short term to long term duration debts and debt securities by considering their credit ratings. A 35% to 20% debt-oriented investment keeps the investor secure and reduces future investment return volatility.
Advantages of Balanced Funds
There are some advantages of investing in Balanced Funds. Let’s have a brief look at these advantages that an investor can avail.
Investors Get a Constant Gain On Their Investment
In balance funds, the investor gets a stable income on their investment. As the bonds and equities are not positively related, and if the share prices are affected by volatility, the bond’s market value remains the same. Hence, the return does not affect much from the odd market scenarios.
Balance Funds Are Less Risky
As it is a mixed fund and includes both debts and equities, setting up a portion in these two reduces the risk associated with the investment and provides a decent return rate. The best thing about this fund is it does not have as many effects of volatility as the equity funds.
Tax Efficiency is Another Advantage of The Balance Fund
Having more equity shares (i.e., above 60%) lets the investor enjoy tax benefits. And after the one year of investment, if the investor gains up to Rs 1,00,000 gain, they will not be required to give tax on it. And for the debt fund, investors are required to pay only 10% tax for three years, and after three years, they need to pay 20%.
What is Equity Fund?
Equity funds are a category of mutual funds, and in this fund, the total number of assets get invested in equity shares only. The goal of this investment is to get maximum return from the investment. And in this investment, the investor needs to face a higher degree of risk from the market’s volatility. However, nowadays, a vast range of equity funds is available for investors to invest and maximize their capital wealth.
Also, the equity funds can be categorized according to various factors such as market capitalization, geography, and many other factors. Popular equity funds are large-cap funds, index funds, mid-cap funds, and thematic funds. All these funds are managed by its fund manager, who performs this activity passively or actively.
Advantages of Equity Funds
Equity funds can seem risky, but it also has several advantages for the investor. Let’s have a look at some of the critical advantages of equity mutual funds.
Diversification is The Identifiable Advantage Of Equity Funds
Equity funds are generally at higher risk, but it gets diversified from its portfolio for better risk management and offers more return. Also, in this fund, the exposure to single stock does not go above 5% in most funds.
Equity Funds Also Have Higher Liquidity
The other advantage of investing in equity is it is more liquid. It is traded regularly; therefore, it has more liquidity, and when an investor thinks fit, they can redeem their investment by selling out in the share market.
Investors Get Tax Benefits When They Invest in Equity Funds
We already discussed that if you invest in equity, you get tax benefits up to Rs1,00,000 if the investment is made for more than one year. As in this fund, you invest in only equity; therefore, you get a higher advantage of tax saving.
Difference between Balanced Fund and Equity Fund
We understand what a balanced and equity fund is, so now we understand the essential difference between a balanced fund and an equity fund.
| Balanced Funds | Equity Funds | |
| Manage Portfolio | In Balanced Funds, the portfolio is distributed in two portions. Such as Equity and Debt, Where equity-oriented funds have a significant portion of total assets. | In Equity Funds, the total assets are invested in Equities by diversifying investment. |
| Associated Risk Factors | Balanced funds are less risky than equity funds as a debt portfolio contains a 35% to 20% portion in total investment and does not get affected by volatility. | Equity funds are at higher risk because of the total investment made on equity. |
| Tax Benefit | Funds are divided into two portions debt and equity, respectively. Debt-oriented funds are taxed as per debt funds tax rules and equity taxed as per tax rules made for equity. | If the equity funds are invested for more than one year, the investor need not pay tax if he earns up to Rs1,00,000 gain. And above it, they need to pay @10% tax without indexation benefit, but for short-term gain, they require paying @15% tax on earned gain. |
Conclusion
In this article, you learned the difference between balanced funds and equity funds and their advantages. Mutual funds are ideal investment options for new investors or those looking for less risky investment options. However, Mutual funds, whether it is a balanced fund or equity fund, can be risky in the short term. But you can expect a significant return in the long term and maximize your capital wealth. Also, debt funds are an excellent option for a stable return with a less risky option for your investment budget. So, I think now you have a complete understanding of balanced fund vs equity fund, and if you need to ask something still, then comment below, we will reply to you.