Balanced Fund

Mutual funds that contain both stock and bond components in a single portfolio are known as Balanced Funds.


What Is a Balanced Fund?

A balanced fund, sometimes called a blended fund, is a scheme that offers a middle ground by offering both growth and income. Balanced funds differ based on asset allocation. Some may heavily favor bonds (debt-oriented), while others prefer a large stock allocation. A standard portfolio comprises around 70% of stocks; the rest is accounted for in bonds. The low bond and high stock allocation provide investors with long-term growth potential and a stable source of income. 

Bonds are stable investment instruments that pay back steady returns, whereas stocks are high risk, and their value fluctuates. Therefore, investors must determine whether their risk tolerance is high or low while building their portfolio. For a balanced fund, the investment objective is usually the neutral growth of the fund. 

How Does a Balanced Fund Work?

A balanced fund is also called an asset allocation fund because the amount of money invested in each asset usually remains within a set range. Balanced funds own hundreds and thousands of securities, providing shareholders with a high degree of investment diversification. Typically, for a balanced fund, the approach is to invest 60% of its assets in stocks and 40% in bonds. On the other hand, professionally managed funds chosen by professional investors have the flexibility to change this fixed ratio. 

Balanced funds differ from target-date funds because they do not change their asset allocation over time and don’t care about your age. A 70-year-old investor gets the same asset allocation as a 25-year-old investor. A target-date fund, on the other hand, considers age when allocating assets. For young investors, with a lot of time before retirement, a high-risk and high-return approach is taken, whereas for older investors, with less time to retire, a safe approach is taken with more emphasis on bonds.

A balanced fund is a long-term investment and acts as a set-it-and-forget-it diversified portfolio. The funds invested are automatically distributed into a mix of assets based on the asset allocation. The portfolios are rebalanced if they stray too far from the general target allocation.

Components of a Balanced Fund Portfolio 

Investors with a low-risk appetite invest in balanced funds for organic growth. Balanced fund elements include a mixture of bonds and stocks.

Bond Component

It’s a special fund within a balanced fund that creates a stable income stream and modifies the portfolio’s volatility, which balances out the price variations from the stocks. As a result, bonds trade daily but don’t experience the wild price swings that stocks may experience. This stability of the fixed-interest securities decreases the chances of wild jumps in the share prices of balanced mutual funds. As a result, bonds provide stability to balanced funds and smooth out the return over time.

Stocks Component 

Refers to funds that prevent purchasing power erosion by balancing out inflation factors, etc. It also ensures the long-term preservation of assets that have been saved mostly for retirement. In this case, company equity holdings tend to lean towards large equities, such as those in S&P 500. Balanced funds usually also include dividend-paying companies. This is because companies that pay dividends over the long term are generally profitable and well-established.

Merits of Balanced Funds

Instant Diversification

Balanced funds offer instant diversification. After making a small investment, your portfolio will be diversified that will likely contain many stocks and bonds. 

Eliminate Anxiety Over Returns

Balanced funds prevent you from stressing over returns and keep you secluded from the ins and outs of the market. In contrast, your fund managers deal with your investment. 

Demerits of Balanced Funds

High Fees 

The fees in balanced funds are relatively higher than those in other funds available on the market because the fund management team is in charge of the asset allocation, and it periodically updates the mix of stocks and bonds as required. As a result, the asset allocation, usually 70% stocks and 30% bonds, may not suit investor needs as changes occur over time. 

No Tax Shielding 

Another downside is that investors have no control over their money. As a result, balanced funds are not suited for tax shielding. 

Minimal International Exposure

Most popular balanced funds lean towards local equities and ignore international equities, which account for nearly half of the world’s total market cap. As a result, the balanced fund limits the number of investors joining the pool from international markets.