Everyone wants to invest their money, and make their money 'work' for them - however, it is not often as simple as it looks, especially since the type of asset determines how well your portfolio will perform and how much risk you will be taking. For some people equities is the option, while for other debt is more an option - however, there is another alternative, the balanced fund. This combines the best of both worlds - a judicious mix of equity and debt, to provide some safety to the capital as well as better returns than pure debt instruments. Let us look at these funds in more detail.

Balanced funds typically invest around 65 - 70% of their corpus in equities and the remaining in invested in debt instruments. These funds are most often not actively managed, in the sense that there is less churn of the portfolio and the asset mix is more or less constant. This also means that balanced funds have lower cost structures than managed equity or debt funds, while being more expensive than passive index funds.

In terms of returns, these provide an intermediate return over pure equity and debt funds, for example over the past 1 year, debt funds have given around 11% returns, while equity funds have generated 25 - 30% returns - balanced funds in the same period have given returns of around 17-20%. These funds are suitable for those with a higher risk appetite, but with longer term financial goals.

In terms of taxation, since over 50% is invested in equities, this is treated as an equity instrument for tax purposes, meaning that there is no capital gains if held for over a year - enhancing the returns further.

These is a good medium to long term investment option, since there will be no extraordinary returns if for example mid-cap stocks suddenly soar, but in the long run, the debt and equity will counter each other's volatility to give moderate returns.

It is advisable to invest in these funds via the Systematic Investment Plan Route (SIP). SIPs help to create wealth by providing the benefits of averaging, i.e. in a rising market the investor will get more returns, while in a falling market one will get more units for one’s investment; over a period of time the returns are higher. This does away with the need to time the market - a difficult proposition even for seasoned investors.

Let us explain this with an illustration - assume there are two investors, Investor A who invests Rs. 12,000 over 6 months in an SIP (at Rs. 2,000/ month), and investor B who invests Rs. 12,000 in one lump sum. Both investors start their investments on the same date, investor A ends up with 1,118 units at the end of 6 months, while investor B has 1,091 units for the same period. Assuming the NAV is Rs. 13 at the date of redemption, Investor A makes a return of 21% as compared to investor B's return of 18%.

(Contributed by Anil Rego, CEO & Founder, Right Horizons)