Long-Term Investment Options

Long-term investment options

      I.        Balanced Fund

Balanced fund is also known as hybrid fund. It is a type of mutual fund that buys a combination of common stock, preferred stock, bonds, and short-term bonds, to provide both income and capital appreciation while avoiding excessive risk.
Balanced funds provide investor with an option of single mutual fund that combines both growth and income objectives, by investing in both stocks (for growth) and bonds (for income). Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss. But on the flip side, balanced funds will usually increase less than an all-stock fund during a bull market.

Generally, balanced funds maintain a 60:40 equity debt ratio. This means that 60% of their total investment is in equity and the balance 40% in debt and cash equivalents. Balance funds combine the power of equities (shares) and the stability of debt market instruments (fixed return investments like bonds) and provide both income and capital appreciation while avoiding excessive risk.

Balanced funds continuously rebalance their portfolios to ensure that the broad asset allocation is not disturbed. Therefore, the profits earned from the stock markets are en-cashed and invested in low risk instruments. This helps the investor in maintaining the appropriate asset mix, without getting into the hassles of rebalancing the portfolio on their own.

    II.        Mutual Funds (Income Funds)

Another long-term investment alternative can be mutual funds, especially the income funds. Mutual funds do away with one of the biggest drawbacks of other alternatives i.e. liquidity. An investor can exit from the fund anytime he wants. Also the income funds rate low on risk and default. The returns offered by most of the well managed funds are higher than the company or bank deposits. Thus, an investor who is willing to take some risk or rather divert the risk associated with corporate deposit towards the income funds can enjoy the benefits of income funds as well.

Income Funds in India usually invest their principal in securities of fixed income such as government securities, bonds, and corporate debentures. There are many mutual funds houses that have launched Income Funds in India. The advantage of Income Fund is that it provides regular income to the investor either on a monthly or quarterly basis. Further the advantage of Income Funds in India is that it also provides stability of capital to the investor. The bonds that are there in Income Funds are usually of the investment grade. The other bonds are of such credit quality that they assure the protection of the capital.

If we compare the returns of some of the Income funds with that of fixed deposits, we find that in the long run, Income funds tend to do better. However, the below average return in last year for Income funds can be attributed to the recession. So, the future can be bright for short term too in case of Income funds as market is doing well.

Income Funds Vs Fixed Deposits: