What Is a Balanced Fund?
A balanced or blended fund is an investment scheme that combines growth and income.
These funds vary in asset allocation, with some favoring bonds (debt-oriented) and others leaning towards a more significant allocation in stocks.
Typically, a balanced fund consists of approximately 65% stocks and the remaining portion in bonds.
This allocation offers investors long-term growth potential while providing a stable source of income.
Bonds are considered stable investment instruments that generate consistent returns, while stocks carry higher risk, and their value fluctuates.
Therefore, investors need to assess their risk tolerance when constructing their portfolio. The investment objective of a balanced fund is usually neutral growth.
How Does a Balanced Fund Work?
A balanced fund is often called an asset allocation fund because it maintains a predetermined range of investments in different asset classes.
These funds hold hundreds or even thousands of securities, providing shareholders with a high level of diversification.
Typically, a balanced fund allocates around 55% of its assets to stocks and 45% to bonds.
However, professionally managed funds can adjust this allocation based on market conditions.
A balanced fund is a long-term investment that offers a diversified portfolio that can be set and forgotten.
Investments are automatically distributed across a mix of assets based on the predetermined asset allocation.
Periodic rebalancing ensures the portfolio stays on track with the target allocation.
Components of a Balanced Fund Portfolio
Investors with a low-risk appetite choose balanced funds for organic growth.
A balanced fund typically consists of a combination of bonds and stocks.
- Bond Component: This segment of the balanced fund portfolio provides a stable income stream and helps to moderate the portfolio’s volatility, offsetting price fluctuations in stocks. Bonds trade daily but tend to experience less price volatility compared to stocks. The stability of fixed-interest securities reduces the likelihood of significant swings in the share prices of balanced mutual funds, providing stability and smoothing returns over time.
- Stocks Component: This refers to the portion of the fund invested in stocks, which helps protect against factors like inflation and ensures the long-term preservation of assets, particularly those intended for retirement. Dividend-paying companies are often included in balanced funds as they are profitable and well-established.
Merits of Balanced Funds
- Instant Diversification: Investing in a balanced fund provides instant diversification. With a small investment, your portfolio becomes diversified, containing a mix of stocks and bonds.
- Eliminate Anxiety Over Returns: Investing in a balanced fund can alleviate the stress of monitoring returns and market fluctuations. Fund managers handle the investment decisions on your behalf.
Demerits of Balanced Funds
- High Fees: Balanced funds tend to have relatively higher fees than other funds in the market. This is because the fund management team is responsible for asset allocation and periodically adjusting the mix of stocks and bonds. The fixed asset allocation, such as 60% stocks and 40% bonds, may not align with investor preferences as their needs change over time.
- No Tax Shielding: Investors have limited control over the tax implications of their investments in balanced funds, making them less suitable for tax shielding strategies.
- Minimal International Exposure: Many balanced funds are biased towards domestic equities and may overlook international equities, which account for a significant portion of the global market. This limited exposure to international markets reduces the pool of investment opportunities for balanced fund investors.