What is a balanced portfolio in mutual funds and how do you create one?

You may have come across the phrase, “Don’t put all your eggs in one basket”. This simple advice applies perfectly to investing. A balanced portfolio is a way to ensure your money is spread across different investments, reducing risks and creating a more resilient portfolio. In this article, we’ll take a look at what a balanced portfolio is, its benefits, and how you can create one that is in line with your financial goals.

Table of contents

• What is a balanced portfolio?
• Balanced portfolio meaning
• Balanced portfolio example
• Benefits of a balanced portfolio
• How to balance your portfolio using mutual funds
• Tips to build a balanced portfolio

What is a balanced portfolio?

A balanced portfolio is one that spreads your money across different types of assets and asset classes such as stocks, bonds, gold etc. It can also involve investing in multiple avenues, combining equities and mutual funds with more conservative investments such as fixed deposits. The goal is to create a mix that balances risk and return potential, so your investments have the potential to grow relatively steadily over time, without exposure to unnecessary risks. If one asset underperforms, others can help cushion the impact.

Balanced portfolio meaning

In simple terms, a balanced portfolio means that you don’t rely too much on one type of investment. For example, if the stock market goes down, your bonds might lend your portfolio some stability, balancing out your overall return potential. Diversifying this way helps reduce risk while aiming for relatively steady long-term growth potential.

Balanced portfolio example

Let’s assume you invest Rs. 1,00,000 and are comfortable with some amount of risk. You might put:

• Rs. 60,000 in equity funds for high long-term growth potential.
• Rs. 30,000 in debt funds for relatively lower risk.
• Rs. 10,000 in traditional avenues for capital stability.

This way, you’re not overly dependent on any single investment, ensuring that your portfolio is growth-oriented but also has some protection against downside risk. This balanced approach can mitigate the impact of market fluctuations while keeping you on track to potentially achieving your financial goals in the long term.

Benefits of a balanced portfolio

Building a balanced portfolio offers several advantages, especially for long-term investors:

• Reduces risk: By spreading your investments, you avoid putting all your money into one volatile asset class. When you do that, you offset the losses in one area by gains in another.
• Steadier return potential: A balanced portfolio can cushion against the ups and downs of the market, providing more consistent returns over time. This makes it ideal for those looking for relatively stable growth in the long term.
• Diversification: It gives you exposure to a variety of assets, including stocks, bonds, and mutual funds, reducing the impact of poor performance in any one area. Diversification helps balance high-risk investments with more stable ones.
• Flexibility: You can adjust your portfolio based on your financial goals, age, and market conditions. For instance, younger investors can lean towards equities, while older investors may focus more on stable assets like bonds.
• Peace of mind: Knowing your investments are diversified can reduce anxiety during market fluctuations. With a balanced portfolio, you’re less likely to panic during market downturns because your risk is spread out.
• Long-term wealth creation: Over time, a balanced approach allows you to potentially grow your wealth steadily while mitigating risk.

How to balance your portfolio using mutual funds

A balanced portfolio of mutual funds is relatively easy to achieve. Here’s how you can do it:

1. Use hybrid funds

Some mutual funds, called hybrid funds, are designed to offer a mix of equity (stocks) and debt (bonds). They automatically balance your portfolio for you. For example:

• Aggressive hybrid funds: Invest more in stocks for higher long-term growth potential, with a smaller portion allocated to debt instruments for relative stable. Suitable for investors comfortable with risk.
• Conservative hybrid funds: Focus more on bonds while still providing some equity exposure, making them suitable for risk-averse investors who want to benefit from the growth potential of the stock market without excessive exposure to it.
• Multi-asset allocation funds: Invest in stocks, bonds, and a third asset class (such as gold) to enhance diversification.

2. Choose equity and debt mutual funds separately

If you want more control, you can invest in individual mutual funds:

• Equity mutual funds for high long-term growth potential and exposure to the stock market.
• Debt mutual funds for lower risk.

3. Regularly rebalance your portfolio

Over time, the weightage of each asset class in your portfolio can change due to market movements. Rebalancing helps you maintain your desired equity-to-debt ratio and stay aligned with your financial goals.

4. Consider your risk tolerance

Your ability to handle risk plays a significant role in choosing a mix of funds. Investors with a higher risk tolerance and a longer investment horizon can allocate more to equity funds, while conservative investors can opt for a debt-heavy portfolio.

Tips to build a balanced portfolio

Creating a balanced portfolio requires some planning. Here are simple tips to help you:

1.Understand your goals

What are you investing for? Is it for retirement, to buy a home, or to fund your child’s education? Your goals will determine how much risk you can take.

2.Consider your age

Younger investors can take more risks and invest heavily in stocks. Older investors may prefer a safer mix with more bonds.

3. Start with a mix of equity and debt

A common ratio is 60% equity and 40% debt, but you can adjust it based on your risk tolerance.

4. Diversify within asset classes

Even within stocks, invest in different sectors (technology, healthcare, etc.) to further spread the risk.

5. Invest through SIPs (Systematic Investment Plans)

Through an SIP, you can invest small amounts regularly, thereby reducing the impact of market volatility.

6. Monitor your portfolio regularly

Check your portfolio at least once a year to ensure it aligns with your goals and rebalance if needed.

7. Avoid emotional decisions

Market fluctuations are normal. Stick to your plan and avoid reacting impulsively to short-term changes.

FAQs

What is a balanced product portfolio?

A balanced product portfolio is different from a balanced investment portfolio. A balanced product portfolio is a mix of products or services that a company offers, designed to achieve strategic objectives while managing risk and maximizing profit. A well-balanced portfolio typically includes a variety of products at different stages of their lifecycle (introduction, growth, maturity, and decline) and caters to diverse customer needs or market segments.

How do you keep your portfolio balanced?

To keep your portfolio balanced, regularly review your investments and adjust the mix of assets. For instance, if stocks perform well and grow disproportionately, you may need to rebalance by investing more in bonds.

How do you maintain a balanced portfolio?

Maintain a balanced portfolio by:

• Diversifying your investments.
• Regularly rebalancing your portfolio.
• Sticking to your long-term goals.

What is the difference between a balanced portfolio and a growth-oriented portfolio?

A balanced portfolio focuses on a mix of equity and debt for steady returns and lower risk. A growth-oriented portfolio emphasises equity investments, aiming for higher long-term return potential but with more risk.

What is a balanced portfolio by age?

Your age often determines the mix of assets in your balanced portfolio. A common suggestion is to subtract your age from 100 to decide the percentage of equity. For example, if you’re 30 years old, 70% equity (100 - 30) and 30% debt might be suitable. However, these are just indicative guides, and your specific investment mix should be tailored to your specific goals, requirements, and risk tolerance. Consulting a financial advisor is recommended.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.