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What is a Balanced Fund?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 03 November 2016
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Balanced funds have to do with the structure of an investment strategy involving mutual funds. The basic idea behind the balanced fund is to make sure that there is a more or less equitable balance between the types of investments that are part of the mutual fund. A balanced fund is understood to be in a good position to provide some sort of consistent growth from one or more of the investments included within the mutual fund, while creating a low amount of risk to the investor. Here is some information about what types of components typically make up a balanced fund, and what to expect in the way of performance.

Because the strategy behind a balanced fund is all about keeping things in proportion, there will need to be some amount of diversification in the types of investments that are represented in the fund. Common stocks are usually one of the components of the balanced fund that helps to provide a consistent pattern of growth, while not creating much in the way of risk to the investment. Other types of stocks are also often included in the mutual fund portfolio, such as preferred stock. Both long-term and short-term bonds are often included. Some assets in the way of cash and holdings in a money market are also often part of a balanced fund strategy.

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It is important to note that a balanced fund does not mean that each component of the investment portfolio commands an equal percentage of the overall investment in the mutual fund account. What it does mean is that the anticipated risk factor and potential for performance of each one of the individual investments is based on the principle of proportion. This approach helps to ensure that the fund results in some sort of steady growth, even if one or two components post a slight loss in a given month.

The idea is to find the right mix between the various components so that there is a reasonable expectation of growth, while still minimizing the chances for any degree of loss anywhere in the investment portfolio. This type of balance may have to be uncovered with some trial and error on the part of the investor. In addition, changes in the market may render a formally stable investment suddenly a wild card, in which case the investor may need to locate a new component of similar type to restore a state of a balanced fund.

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BabaB
Post 7

@PinkLady4 - I've tried it both ways and I've come to the conclusion that it's better to pay a fee and have an investment manager choose a balanced mutual fund portfolio. Trying to do it yourself takes a lot of time, research, and stress to put it all together and buy and sell when it seems the right thing to do.

It's true that a manager is fairly well trained, but there's no way anyone can predict the stock market changes. But I'm sure I was worse at calling the right buys and sells.

PinkLady4
Post 6

When I had money in a mutual fund, I worked with a fund manager. A couple of times a year, I would talk to him and I would tell him my financial situation at the time and any goal changes. We would decide together whether I wanted a more conservative or riskier portfolio.

A lot of your choice would probably depend on how many working years you have and how close you are to retirement. To make a balanced mutual fund, it's good to have some money in several categories, like large cap, growth, and traditional funds.

Mammmood
Post 5

@NathanG - Actually I don’t think what you have is a balanced fund. You’ve simply diversified your portfolio, which is wise in itself, but the diversification has to be done by weighing the individual asset classes and determining which will provide the best returns given the risks involved.

I don’t know the actual formulation for the balanced fund asset allocation, but I don’t think it’s simply an equal slice of the pie for each asset class.

I think your best bet is to invest in a balanced fund portfolio. These funds have all the asset classes included in them, with the appropriate, proportional diversification.

everetra
Post 4

@NathanG - I would say you’re balanced, but of course I don’t know for sure without looking at your portfolio.

I do know that historically balanced fund performance has been pretty stable, around 7% in times of recession and 9% in boom cycles. That’s not bad, and it’s one reason the funds remain popular.

It’s the bond component that stabilizes the fund in recessionary cycles. Nowadays people are also looking to gold as a safe hedge against inflation.

I don’t know if gold has traditionally been an asset classes thrown into the balanced fun mix, but it would make sense given its run over the past few years.

NathanG
Post 3

I don’t know if I would characterize my portfolio as a balanced mutual fund or not. My fund contains a mix of equities, like aggressive growth stocks, bonds, money market, emerging markets and others.

The reason I don’t characterize it as balanced necessarily is because I have an equal percentage allocation to each of these different investment instruments – in my case, it happens to be 10% each, allocated among 10 securities.

According to the article, equal percentage allocation is not what makes a balanced fund balanced. However, I do think things are more or less proportionate in terms of investment potential, as the different securities can balance each other out depending on the economic cycle.

So I think I do have a balanced fund, but it’s also worthwhile to take a look at it now and then.

comfyshoes
Post 2

@SauteePan - You have a point, but if you have a long time horizon for retirement you could be cheating yourself of some hefty gains. If you only about ten years before retirement than a balanced mutual fund would make sense, but if you have thirty years or more then it would be a bad choice in my opinion because you have a long time to make up for these losses and be able to make huge amounts of money over the long run because of the power of compounding.

I like to gamble a little and really stay away from these types of funds. They are really boring to me and I find the balance fund performances in general to be lackluster.

SauteePan
Post 1

I usually like balanced mutual funds because it has a nice combination of mutual funds that are invested in equities and a good portion of the fund is usually invested in bonds. It offers great diversity and you don’t have to worry about the market so much because stock funds and bonds have an inverse relationship.

So when stock funds are down, bond funds tend to do better. This is a great type of fund especially is you are overwhelmed by all of the possible investment choices. The downside is that since this tends to be a more conservative of fund your gains won’t be as high as you would typically receive with a more aggressive stock fund.

With all of the volatility of the market, I personally prefer a safer bet like this.

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