There are many kinds of mutual funds and each of them offer different benefits. Some of them are made for active management, while others gravitate towards passive management. Meanwhile, there are balanced funds, which is basically a combination of actively managed and passively managed mutual funds.
What is a Balanced Fund?
In a nutshell, a balance fund is a fund that mixes stocks, bonds, and even money market assets in one portfolio. In general, these hybrid funds stick to a relatively fixed mix of stocks and bonds that reflects either a moderate or higher equity component, or conservative or higher fixed income, component orientation.
Digging Deep into Balanced Funds
Balanced funds are aimed at investors who want a combination of safety,income, and decent capital appreciation. The amount of money that this type of fund pours into each asset usually has to be within a predetermined minimum and maximum.
Although they are in the “asset allocation” area, balanced fund portfolios do not materially change their asset mix. This is not like life-cycle, target-date, and actively managed asset allocation funds, which make changes as a response to an investor’s changing risk-return appetite and age or overall investment market conditions.
Equities and Inflation
Investors who have dual investment objectives gravitate towards balanced funds. Typically, retirees or investors with low risk tolerance use these funds for growth that overcomes inflation and income that answers to current needs.
While retirees scale back risks as they get older, many people recognize the need for equity exposure as life expectancies increase. While the equity holdings of this kind of fund usually favor large, dividend paying companies, those issues usually offer long term total returns that follow the S&P 500 index.
Equities help prevent the erosion of purchasing power and ensure the long term preservation of retirement nest eggs.
Investment grade bonds like AAA corporate issues and US Treasuries offer interest income from semi-annual payments, while large-company stocks offer quarterly dividend payouts to enhance yields. Retired investors may take distributions in cash to boost income from pensions, personal savings, and government subsidiaries.
Additionally, bonds and other fixed income assets are less volatile than stocks. Bondholders have a claim against assets of a company while stocks represent ownership, bearing all inherent risk if bankruptcy takes place.
Hence, debt security prices do not fluctuate along with stocks. Their relatively better stability prevents wild swings in the share price of a balanced fund.
Advantages of a Balanced Fund
Because balanced funds seldom have to change their mix of stocks and bonds, they usually have lower total expenses and fees. On top of that, since they automatically spread an investor’s money across a variety of types of stocks, they minimize the risk of picking the wrong stocks or sectors. Lastly, balanced funds for retirement let investors withdraw money periodically without disrupting their asset allocation.
