Invest in balanced funds to get taste of both risk and return

While people are looking only for long-term investments, meeting medium-term needs are usually neglected. 

As you are creating your investment bucket, most of the financial planners will advise you to look at long-term investments because that is when your savings will be required the most. 

For long term investments, the risk factor is not as high as in small and medium term and the returns are better. However, in case of medium-term investments you have to balance between risk and return.

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The most common approach to balance between risk and return would be to invest part capital in fixed income asset, say Fixed Deposit, since it provides steady returns with safety and remaining in equity shares in anticipation of higher returns. 

As we are talking about medium-term investments here, the first thing is know what is considered as medium term? 

According to Investopedia, medium term is an asset holding period or investment horizon that is intermediate in nature. The exact period of time that is considered medium term depends on the investor's personal preferences, as well as on the asset class under consideration. In the fixed-income market, bonds that have a maturity period of five to 10 years are considered to be medium-term bonds.

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Before you head towards fixed deposit, we give you one better option. Answer is Balanced Fund. 

Balanced fund invests 65% or more corpus in Equity & upto 35% in Debt or Fixed Income. This fund qualifies for Equity taxation where Long Term Capital Gains Tax beyond holding period of one year is NIL. 

Due to this 65% + 35% construct, balanced funds are geared to provide high returns from equity and stability of debt in the said proportion.

Amol Joshi, Founder, PlanRupee Investment Services, said if one were to use FD instrument & equity separately, the FD interest would be taxable reducing the overall returns. Because of the way balanced funds are structured the debt portion also becomes tax free boosting overall returns.

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"On the other hand if one were to trade into equity shares and if the sale transaction happens within one year of holding period, then the capital gains from sale would be taxable. Mutual funds are considered as pass through vehicle and don’t need to pay tax even if some of the holdings are sold in less than one year period. Again, this is advantageous and enhances overall return of the portfolio," Joshi added.

Due to host of such benefits, invest in balanced funds to get best of risk and return.