How to Assess the Risk Profile of a Balanced Fund - MySIPonline
Oct 11, 2017 4 min read

How to Assess the Risk Profile of a Balanced Fund?

You must know these checks before investing in a balanced fund.
The balanced fund is the category of the mutual funds which invest proportionately into both the equity and the debt instruments. It doesn’t matter that you are a seasoned investor or a beginner, the balanced fund provides investment solutions to all types of investors.

For a newbie investor, it serves the safety of the debt along with the exposure to the high rewarding equity market. In case of a proficient investor, it serves as the nature-based investing solution. It means, if the investor is likely to take a higher risk, he/she may invest in the equity-oriented balanced fund, in the other case debt-oriented serves the preferable investment goals. Last but not the least, the seasoned or the expert one can also fetch the benefits of this category of funds by investing as per the suitability. However, there are some checks which help to assess the risk profile of a balanced fund. So, you should know these points before putting your hard-earned money in any scheme.

Four Checks Determining the Potential of a Balanced Fund:

  1. Equity-Debt Blend : The adequate blend of equity and debt exposure is considered while investing in a balanced scheme. You must check the blend by analysing the scheme’s portfolio and watch out the asset allocation of the scheme. There are various hybrid funds which follow the investment style of 75:25 in equity-debt ratio. Moreover, some less aggressive plans invest in a mix of 60:40. Therefore, you need to select the suitable one as per your investment profile for the best results.
  2. Holdings : You may choose the balanced funds to attain the essence of safety, but the equity exposure of the hybrid fund shows the return generating capability. So, the one which has a majority of the allocation in the stocks have the better scope of providing good returns. Moreover, the holdings of that scheme can be examined because the potential stock can brighten up the fund's potentiality by generating exceptional returns. In the recent years, the small and mid-cap stocks have delivered excellent returns by showcasing amazing growth in the long run than the large-cap one. Therefore, the fund which invests in the stocks of potential companies always have the better chances to provide skyrocketing returns among the category.
  3. Debt Strategy : Not only the checks on the equity holdings will allow you to find the best balanced fund to invest. But, the debt portion also plays a vital role in determining the overall compatibility of the scheme. However, it majorly depends on your requirements and investment objectives. If you want to earn higher returns by giving higher attention to the equities, you must precisely check the holdings of equity. But, if you are focusing more on the regular income option, then your capital should be deployed in the debt-oriented funds. In this case, you need to be focused on the credibility of the debt instruments in which the scheme is investing. There are various debt instruments like bond papers, debentures, government securities, etc. You must check the credibility of the instruments as it plays an important role in deciding the income generating capacity of a debt fund. For instance, if you want to invest in a secured debt instrument, then government holdings (SOV) are the best options.
  4. Quantitative Analysis : Last but not the least, you must take a round on the quantitative analysis of the scheme before adding it to your portfolio. It is not a critical task as you can check the capability of the fund even if you have the handful of financial knowledge. To do a quick analysis of the scheme, you are required to check the Assets Under Management (AUM), Turnover Ratio, Sharpe Ratio, Alpha, Beta, SD, and the past returns provided by the fund. Let’s quickly understand that how to analyse these factors of a scheme:
      • Sharpe Ratio : It depicts the risk-adjusted returns of the fund. The greater Sharpe ratio means, the greater risk-adjusted returns on the investments.
      • Turnover Ratio : It shows the changes in the portfolio holdings over time. It is preferable to pick the plan which has least turnover ratio.
      • Alpha : It shows the excess of the returns which the fund generates over its benchmark index. The higher the alpha denotes the competitiveness of the fund against its benchmark.
      • Beta : It shows the sensitivity of the fund in relation to the market movements. For a conservative investor, a fund with the lower beta is preferable, and vice-e-versa.

Moreover, the past performance and returns can be analysed on the basis of one-, three-, five-year cycle. Mostly, it is better to observe the performance of the scheme on a long-term basis. A fund which has performed well over a cycle of five-year or ten-year is considered more compatible with the other of the same category. Know more about investing in balanced funds and start investing to taste the best mixture of capital appreciation and safety. The team of MySIPonline always stays ready to serve you the best experience of investment in mutual funds.

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