Pure equity funds offer maximum exposure to equity but trends also reveal that balanced funds have performed better than such funds, especially because of their diluted exposure to equity as opposed to pure equity funds.
They are mutual funds that buy an assortment of common stock, preferred stock, bonds and short-term bonds to provide both income and capital appreciation while avoiding excessive risks. Their objective is to provide investors a single mutual fund that combines growth and income, by investing in stocks and in bonds, respectively. They keep a balance between equity and debt, with equity comprising the higher component.
Balanced funds ensure that investors will not have to bear significant losses in the event of any downturn in the stock markers.
For instance, during the financial crisis of 2008/09, balanced funds lost only 42% while returns from diversified equity funds dropped 53%.
Balanced funds maintain the ratio between equity and debt by dividing the two at a fixed percentage. For this, the fund has to buy and sell from time to time which gives rise to the concept of asset allocation.
Therefore, if a balanced fund with equity to debt ratio of 70:30 were to reach the 77:23 level, the fund manager ensures that he sells the excess equity to bring the fund’s balance level back to 70:30.
But with equity funds, if the ratio already stood at 98:2, the equity part would still remain around the same ratio even if there were to be a lot of selling pressure in the market, and the question of asset allocation would not arise.
Hence, asset allocation is the main advantage available to balanced funds yielding superior returns in the long term, but in short run-ups, they will not outperform pure equity based funds, especially if there were to be a bull run.
Time, however, plays a great role in the assessment of performance of balanced funds.
Source:-
http://flame.org.in/knowledgecenter/balancedfunds.aspx#sthash.fBeG58h0.dpuf