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What Are Balanced Funds? – The “Variety Pack” Fund

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Introduction

 

 

Most commonly, funds invest in a single asset class. For example, equity funds invest in a variety of stocks, and fixed income funds invest in a variety of bonds.

A balanced fund is different in that it invests in multiple asset classes. Most balanced funds invest in stocks, and money markets.

The term “balanced” stems from the idea of balancing risk and potential return between the portfolio’s two main assets, stocks and bonds.

In this lesson, we will be answering the fundamental question of today’s lesson: What are balanced funds? – as we introduce you to balanced funds, explain different allocation examples, and discuss the risk and potential benefits of this fund type.

 

But before we begin, we would like you to read and agree to the Terms & Conditions of this post before you proceed any further.

Disclaimer: Invest In Wall Street is in no way financially or legally responsible for any investing decisions made by any of our readers and are, in turn, acting on their own free will. The information in this article is purely educational and should not be abused or misconstrued in any way, shape, or form.

 

What Are Balanced Funds?

 

 

Balanced funds include both mutual funds and exchange-traded funds, or ETFs. However, historically, most balanced funds have been mutual funds.

A balanced fund is just one among other types of funds that combine multiple asset classes in a single portfolio.

Two other types are asset allocation and target date funds. However, the difference between a balanced fund and these two funds is the possibility of allocation changes. Over time, the allocations in target date and asset allocation funds will change.

Balanced funds, on the other hand, usually have fixed allocations between a predetermined minimum and maximum as set forth by a fund’s prospectus.

For instance, a more conservative balanced fund might allocate 20% to 50% of a portfolio to stocks, and the rest to bonds and money markets – while a more aggressive balanced fund might allocate 50% to 70% of a portfolio to stocks, and the rest to bonds and money markets.

The stock allocation is expected to grow a portfolio over time because stocks tend to deliver higher returns than bonds – but with more risk.

 

 

The bond portion of a balanced fund is intended to offset risk associated with stocks. Bonds are historically less volatile than stocks and deliver regular interest payments.

The lower volatility in bonds counteract the higher volatility in stocks and help reduce the overall risk in the portfolio. This benefit of overall lower volatility makes balanced funds less risky than stock-only funds.

 

 

Another benefit is the potential growth from the stock allocation. This growth can potentially generate higher returns than bond-only funds.

But keep in mind, a balanced fund has its risks too.

Risks & Costs Of Balanced Funds

 

Stocks are still stocks and therefore, have market risk. So if the stock market plummets, the value of a balanced fund stock holdings would likely decline as well.

 

 

Bonds are exposed to interest rate risk. So if interest rates rise, the value of a balanced funds bond holdings would likely decline.

 

 

Additionally, because balanced funds invest in multiple assets, the expense ratio of these funds can be higher than stock or bond-only funds.

Investors can help minimize these higher fees by searching for balanced funds with a low expense ratio. A low expense ratio means the ongoing fee for investing in a fund is low.

These savings add up over time, potentially allowing investors to grow their portfolio even more. After finding funds with low expense ratios, its important to research the stock and bond allocations in a balanced fund.

Asset Allocations Of Balanced Funds

 

As discussed earlier, allocations vary among balanced funds.

Funds that have a higher allocation to stocks than bonds are generally appropriate for investors with long time horizons and high risk tolerances.

Conversely, funds that have a higher allocation to bonds and stocks are generally appropriate for investors with short time horizons and low risk tolerances.

By balancing the risks and potential returns between stocks and bonds, balanced funds combine the benefits of growth and income investments in an attempt to steadily grow a portfolio over time.

 

Quick Recap

In Review….

Balanced Funds

 

  • Balanced funds include both mutual funds and exchange-traded funds, or ETFs. However, historically, most balanced funds have been mutual funds
  • A balanced fund is just one among other types of funds that combine multiple asset classes in a single portfolio
  • Two other types are asset allocation and target date funds. However, the difference between a balanced fund and these two funds is the possibility of allocation changes. Over time, the allocations in target date and asset allocation funds will change
  • Balanced funds, on the other hand, usually have fixed allocations between a predetermined minimum and maximum as set forth by a fund’s prospectus
  • The stock allocation is expected to grow a portfolio over time because stocks tend to deliver higher returns than bonds – but with more risk
  • The bond portion of a balanced fund is intended to offset risk associated with stocks. Bonds are historically less volatile than stocks and deliver regular interest payments
  • The lower volatility in bonds counteract the higher volatility in stocks and help reduce the overall risk in the portfolio. This benefit of overall lower volatility makes balanced funds less risky than stock-only funds

 

Risks Of Balanced Funds

 

  • Stocks are still stocks and therefore, have market risk. So if the stock market plummets, the value of a balanced fund stock holdings would likely decline as well
  • Bonds are exposed to interest rate risk. So if interest rates rise, the value of a balanced funds bond holdings would likely decline
  • Additionally, because balanced funds invest in multiple assets, the expense ratio of these funds can be higher than stock or bond-only funds
  • Investors can help minimize these higher fees by searching for balanced funds with a low expense ratio. A low expense ratio means the ongoing fee for investing in a fund is low
  • These savings add up over time, potentially allowing investors to grow their portfolio even more. After finding funds with low expense ratios, its important to research the stock and bond allocations in a balanced fund

 

Asset Allocations Of Balanced Funds

 

  • Funds that have a higher allocation to stocks than bonds are generally appropriate for investors with long time horizons and high risk tolerances
  • Conversely, funds that have a higher allocation to bonds and stocks are generally appropriate for investors with short time horizons and low risk tolerances
  • By balancing the risks and potential returns between stocks and bonds, balanced funds combine the benefits of growth and income investments in an attempt to steadily grow a portfolio over time

 

 

And this has been another successful lesson, here at Invest In Wall Street – where we discussed another type of mutual fund: Balanced Funds.

These types of funds consist of various asset classes – which is a plus for diversification. Unlike other types of mutual funds that periodically change their asset allocation, balanced funds have a FIXED asset allocation. So in other words, you get what you pay for – as these allocations are not subject for changes. Balanced funds typically use stocks to grow the investors investment, and use corresponding bonds as a safety cushion to help offset stock market risk and preserve capital. This neutralizes the volatility of balanced funds, making them slightly safer than that of stock or bond-only funds.

However, like all other mutual fund investments, balanced funds are co-dependent on the performance of the underlying assets. And since they contain multiple asset classes, such as stocks and bonds, these funds can suffer from a bearish stock market or rising interest rates. Balanced funds may also be subject to a slightly higher expense ratio – since you are managing more asset classes after all.

Overall, these are still considered to be moderately safe investments, just make sure you fully understand the risks that come with this investment and research balanced funds with lower ratios – as this can save you money in the long run.

I hope you have enjoyed this post and found the information to be quite useful. If you have any questions or concerns, please feel free to leave them down in the comment thread below and make sure to like and share this post.

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