The Pros and Cons of Balanced Funds for Retirement Income

1. The Pros and Cons of Balanced Funds for Retirement Income In life when retirement phase approaches, the sun seems to be setting on the horizon and then we start taking stock of our financial health. This is the period when we tend to revamp our investment strategy and go cautious on generating steady income and focussing on capital appreciation for the future. There are various investments options available in the market but if you wish to opt for steady growth with moderate returns, then investment in Mutual Fund is one of the best options. There are multiple benefits of investing in mutual funds from professional fund management to easy product to lesser cost. However, choosing the best-suited product is quite a daunting task as it needs to be weighed in terms of potential risk versus returns so as to maximize the potential earnings! To simplify the process, mutual fund investing has been categorized into four distinct phases: 1. Youth​: 1. Investment Strategy: Growth-Oriented Long-Term Investments 2. Investment Life stage: Short Term financial goal 3. Mutual Fund Investment: Diversified equity 2. Middle age: 1. Investment Strategy: Diversify investment majorly in Growth / Equity Investment 2. Investment Life stage: Medium to Long-term financial goals 3. Mutual Fund Investment: Diversified equity, ELSS 3. Pre-retirement: 1. Investment Strategy: Re-evaluate diversification by reducing high-risk investments 2. Investment Life stage: Diversification to get maximum returns 3. Mutual Fund Investment: ​Balanced​, Index, Debt Income, GILT 4. Retirement plus: 1. Investment Strategy: Change Asset allocation mix towards conservative assets 2. Investment Life stage: Return on investment with capital protection for post-retirement living 3. Mutual Fund Investment: ​Balanced​, Liquid Funds, Ultra Short Term The retirement age is quite a complex scenario and if we have existing investment, we often tend to liquidate the same in one go and want to play the safe game. But is it really a safe game? By withdrawing Mutual Fund investment and parking the same in a Fixed Income product with guaranteed returns might give you peace of mind but may not give you the requisite income which is needed to support your retirement lifestyle and inflation. It is a natural tendency of investors to lower their equity allocation as he approaches retirement, so as to decrease the risk on the portfolio. Thus, opting for a Hybrid Fund at the pre-retirement phase or the retirement plus phase makes sense. In fact, it will be a good choice to invest in the ​Hybrid​​Fund​ at such stage of the life cycle. What is a Balanced Fund?

2. A ​Balanced Fund​ is an equity-oriented Hybrid Fund where the portfolio is allocated around 65% in Equity and 35% in Debt and Money market instruments. This is a moderate risk tactic while approaching the retirement age. It’s a fixed mix of Equity as well as Debt and is a part of ​Hybrid Fund​ as there are more than 2 asset classes in the fund. An equity-oriented Hybrid Fund needs to maintain at least 65% in equity and equity-oriented funds so as to reap the benefits of equity taxation. Why Balanced Funds? As a beginner, when you think of investing in mutual funds for a better return for relatively less risk with a long-term goal in mind, then balanced funds are ideal choice as they have significant exposure to equity which serves your need for long term growth and the portion of investments made in debt will take care of your concern for volatility risk. Below are some of the features of a balanced fund which makes it a well-suited option for risk-averse investors. Effective Risk-Based Return: Balanced fund provides a good long-term opportunity by investing a significant portion of portfolio corpus in the equity asset class. Despite the exposure to the equity market, these funds provide a cushion of debt to the investor and thereby keeps the volatility risk under control. The balanced fund does well even when the stock market is under pressure, as they have debt shield. That means they are safer than pure equity funds as they give effective return when the markets gain and they make a limited fall in a difficult phase of the market. Asset Rebalancing: The fund’s portfolio consists of two major asset classes’ equity and debt in a fixed proportion and thereby eliminates the requirement of buying equity and debt funds separately. Asset rebalancing is a unique feature of this fund. Fund manager maintains the portfolios equity-debt proportion at the desired level. When the market is high, the fund manager sells the portion of equity and invest them in debt to maintain the maximum level. Likewise, when the market falls, equities are bought to maintain the minimum level. This way, the fund manager keeps churning the fund’s portfolio to maintain the ideal composition. Automatic rebalancing feature of the fund is well suited for investors who find it difficult to manage the desired allocation by keeping a regular watch on the market. Is Balanced Fund a good option for the retired? The Pros of investing in ​Balanced​​Fund for the Retired ​are - 1. Stocks in the ​Balanced Funds​ are ​diversified​ across various ​stock categories​. It’s a sort of a mix from ​low to medium risk stocks​ so apt for your risk appetite at this juncture of life. 2. Dividend ​income on ​Equity​ and ​Interest​ income of ​Debt​​enhance the yield​. 3. Tax treatment​ for ​Equity oriented​​Balanced​​Funds​ is same ​like Equity Fund ​so more than Rs. 1 Lakh gain held over 12 months are taxable @ 10% and Short-term capital gain is taxed @15%. 4. You will get a ​steady income from Debt​ portion of Fund and ​money can be withdrawn occasionally​ without having an effect on asset allocation. 5. The cost of managing the fund i.e. ​expense ratio is low​ compared to the average cost of other mutual funds due to the lesser change of mix of stocks & bonds.

3. 6. You get the best of ​both Equity as well as Debt​. The ​Returns from Equity​ and ​Stability from Debt​. So, a win-win situation for you. The Cons of investing in ​Balanced​​Fund for the Retired ​are - Though now you know why you can invest in ​Balanced​ or ​Hybrid Fund,​ you must also be aware of the flipside before investing: - 1. Since asset allocation is done by the fund manager, you ​do not have​ any ​control​ over it. Such allocation ​may not suit your requirement​ as your investment ​needs ​might change over time. Though this is true for all mutual fund investing in balanced funds, your equity exposure remains to be a minimum of 65% at all points of time irrespective of your asset allocation needs. 2. Balanced funds might have a lesser risk than pure equity funds since the equity exposure is limited, but it surely has an element of risk associated with both equity and debt components. Balanced or Hybrid Funds are still having an ace above the other choice of investments like Bank or Fixed deposit. An investor may think of investing separately in equity stock and debt instruments as per his cash flow requirement but it will be a tedious task to handle many financial transactions especially during retirement plus phase of time. Thus, investors in the Retirement Plus phase may go for a mix of Balanced Fund and Liquid Fund, where you can enjoy the returns from the Balanced Fund and liquidity from Liquid Fund for your emergency corpus. You can also choose to systematically withdraw your investments after one year from a Balanced Fund to a Liquid Fund by using the SWP route. There are multiple ways and means of investing for the retired and you, as a Retirement Plus individual, need to weigh your pros and cons and then invest according to your needs! Balanced Fund is definitely a boon to the investor while he approaches the retirement age and even post-retirement period, as long as the risk appetite, asset allocation and the risk profile of the investor has been taken into consideration!