A balance fund is a popular choice among investors looking for a low-risk investment alternative. The basic idea with a balanced fund is to obtain capital appreciation and some income without having to take any high risks. Do not expect more than a modest capital appreciation from a balanced fund. Many retirees utilize balanced funds to achieve a growth that outpaces inflation and get some income that can supplement their current needs, without taking any high risks with their nest egg.
Typically, a balanced fund will invest in stocks and bonds, and some balanced funds also have a money market component. It is common for balanced funds to stick to a fixed mix of stocks and bonds. A balanced fund could for instance have a portfolio that always contains 50% bonds, 40% equities and 10% money market instruments.
In many cases, there are rules in place that stipulate that the amounts invested into each asset much be kept within a set minimum and maximum level. Unlike life-cycle funds, target-date funds and actively managed asset-allocation funds, the balanced fund will not dramatically change its asset mix. Balanced funds will however be re-balanced once a year (to return proportions if they have changed) or be restructured somewhat to favour market conditions.
Balanced funds are known to favour shares in large and well-established corporations, especially corporations with a long history of regular dividend payments. If you peek into the stock portfolio of a typical balanced fund you are likely to find a lot of S&P 500 companies.
In addition to dividends, balanced funds usually have a revenue stream from bonds. The bonds will also help reduce volatility within the investment portfolio. Low-risk (investment-grade) bonds are favoured, such as AAA corporate issues and government bonds issued by countries with a high credit rating.
Is a balanced fund the same as a blend fund?
A balanced fund will invest in both stocks and bonds, while there are many blend funds that contain no bonds or other fixed-income securities – just stocks. They are called blended because they invest in both growth stock and value stock.
Generally speaking, a blend fund tend to lose more value than a balanced fund when the equity markets perform poorly. A balanced fund is balanced because it contains a carefully balanced mix of stocks and bonds. Since bonds and equity markets doesn’t move together, the stocks and the bonds will balance each other out. If the stock market is performing poorly, we can expect the bond market to be doing well, and vice versa.
Pros and cons of the balanced fund
With a balanced fund, it is easy to achieve a high degree of diversification and there are plenty of balanced funds to chose among that have managed to get the cost of diversification down to a really low level.
Naturally, not all blend funds are alike when it come to diversification. If a high degree of diversification is important to you, make sure you pick a balanced fund that is diversified in many different ways, including geographical diversification and industry diversification for both stocks and bonds.
Even with a fairly small amount of money to invest, you can achieve a high degree of diversification by opting for a balance fund. Constructing your own portfolio with the same level of diversification would require considerably more money and it can also be difficult for you to keep the expense ratio down. There are plenty of balanced funds where the expense ratio is approximately 1.5% and some balanced funds have gotten it down to 1.3% or even less.
PRO: You don’t have to do the rebalancing
If you put together your own portfolio with stocks and bonds, you will be responsible for rebalancing it as necessary. With a balanced fund, the fund manager will do the rebalancing for the fund – you don’t have to worry about it.
CON: You give up control
A professional fund manager is not necessarily better than you when it comes to putting together an investment portfolio. By investing in a fund (any fund, not just balanced funds) you give up control over your money to a fund manager and the result is by no way guaranteed to be better or even equal to how your own portfolio would have performed.
If you can not find a balanced fund that exactly matches your ideas about how to invest, you will be required to comprise in order to keep your money in a balanced fund. You might for instance find that the fund manager is buying shares in corporations that you would prefer not to invest in, e.g. for ethical or religious reasons, or because you believe that the corporation is about to reach a rough patch financially.
CON: It might be too low-risk for you
Low-risk might feel good if you are a risk-averse person, but is it really in your best interest to go with a low-risk fund at this stage in your life? Sometimes doing low-risk investments can actually be quite risky for your long-term wellbeing if it means being likely to not get enough money together in time for your retirement.