What is a Balanced Fund?
A balanced fund is a type of mutual fund and is often referred to as a hybrid fund. It aims to provide both growth and income by having a mix of stock and bond investments in its portfolio.
A typical composition of a balanced fund is a fund that invests 60% in stocks and 40% in bonds. In general, it maintains a largely constant ratio of stocks to bonds.
How does a balanced fund work?
Balanced fund works by investing in a mix of stocks and bonds, as well as other securities like real estate investment trusts (REITs) to achieve its objective of providing both growth and income.
The fund manager chooses a specific allocation of stocks and bonds, which they believe will help the fund to achieve its investment objective while managing risk.
The stocks component provides growth potential, and the bonds component offers stability and income through regular coupon payments.
The fund’s performance is determined by the performance of its underlying investments. If stocks in the portfolio perform well, the fund’s value may increase, but if stocks perform poorly, the fund’s value may decrease.
Investors can purchase shares in a balanced fund, just like they would with any other mutual fund. The fund pools the money from many investors to buy a diversified portfolio of securities, allowing them to invest in a mix of stocks and bonds with a relatively small amount of capital.
Balanced fund examples
Conservative Balanced Funds
This is for those who do not feel comfortable with high market fluctuations. Conservative balanced funds typically have a 35% stock, 60% bond, and 5% cash asset allocation.
Moderately Balanced Funds
These funds often maintain a mix of stocks, bonds, and cash suitable for investors who are okay with some price fluctuation. A moderately balanced fund’s typical asset allocation is 65% equities, 30% bonds, and 5% cash.
Aggressive Balanced Funds
These balanced funds are suitable for investors who don’t mind big price swings because they have the greatest equity allocation. Typically, 85% of an aggressive balanced fund’s assets will be allocated to stocks and 15% to bonds.
Types of balanced funds
1. Equity-oriented Balanced Funds
These funds invest at least 65% in equities and equity-related instruments. The remaining capital is then invested in debt instruments or money market assets to ensure stability during unpredictable market conditions.
2. Debt Equity Balanced Funds
Here, at least 65% of the portfolio is allocated to debt securities. They focus their investments on fixed-income assets like treasury bills, debentures, bonds, etc. To add liquidity, a portion of the fund could also be invested in cash and cash equivalents.
Balanced Funds: Advantages and disadvantages
Advantages
- Balanced Funds lower your potential for losses during volatile market conditions.
- Financial experts manage balanced funds, choosing the assets to guarantee the fund performs successfully. This is a choice to consider if you’re new to investing or need more time. You won’t have to spend hours picking assets or rebalancing your portfolio.
- Investing in balanced funds reduces the need to invest separately in equities and bond funds. It is simpler to keep track of the success of your portfolio.
- Balanced funds are less susceptible to market volatility since they strategically blend assets in debt and equity securities. Equity investments aid in capital growth, while debt investments provide strong returns while shielding assets from market turbulence.
Disadvantages
- Less control: They may not be the best option for hands-on investors because fund managers oversee the funds. Balanced funds are made for investors who want to manage their money passively.
- Balanced funds still carry some level of risk because of their equity component, especially when the bulk of assets is allocated to stocks.
- Hidden fees: Sometimes, the associated fees when investing are high. For many investors, balanced funds may be less attractive an alternative due to the fees they incur.
Balanced Fund vs Index fund
Balanced funds and index funds are both types of mutual funds, but they differ in terms of their investment objectives and strategies.
A balanced fund is a type of mutual fund that aims to provide both growth and income by investing in a mix of stocks and bonds. An index fund is a type of mutual fund that seeks to track the performance of a specific market index.
Index funds typically invest in the same stocks as the index they track, in the same proportion. The objective of an index fund is to provide broad market exposure and low-cost investment options.
In summary, balanced funds are actively managed with the goal of balancing risk and reward, while index funds are passively managed with the goal of tracking a specific market index.
Learn more about Index funds.
Is a balanced fund a good investment?
Investors with low-risk tolerance find balanced funds appealing because they grow faster than inflation and offer consistent returns.
Invest in Balanced Funds on Cowrywise
Here are some balanced funds for you to start investing on Cowrywise:
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