What Is a Balanced Fund?
A balanced fund is a mutual fund that contains a stock component, a bond component, and sometimes a money market component in a single portfolio. Generally, these funds stick to a relatively fixed mix of stocks and bonds. Balanced mutual funds have holdings that are balanced between equity and debt, with their objective somewhere between growth and income. This leads to the name “balanced fund.”
- Balanced funds are mutual funds that invest money across asset classes, including a mix of low- to medium-risk stocks, bonds, and other securities.
- Balanced funds invest with the goal of both income and capital appreciation.
- Balanced funds serve retired or conservative investors seeking growth that outpaces inflation and income that supplements current needs.
Understanding Balanced Funds
A balanced fund is a type of hybrid fund, which is an investment fund characterized by its diversification among two or more asset classes. The amounts the fund invests into each asset class usually must remain within a set minimum and maximum value. Another name for a balanced fund is an asset allocation fund.
Balanced fund portfolios do not materially change their asset mix, unlike life-cycle, target-date, and actively-managed asset allocation funds which evolve in response to the investor’s changing risk-return appetite and age or overall investment market conditions.
Elements of a Balanced Fund Portfolio
Typically, retirees or investors with low-risk tolerance utilize balanced funds for healthy growth and supplemental income. The equities component helps to prevent erosion of purchasing power and ensure the long-term preservation of retirement nest eggs. Historically, inflation averages around 3% annually, while the S&P 500 index averaged about 10% between 1928 and 2018. The equity holdings of a balanced fund lean toward large, dividend-paying companies and equity issues whose long-term total returns track the S&P 500 Index.
The bond component of a balanced fund serves two purposes.
- Creation of an income stream
- Tempers portfolio volatility
Investment-grade bonds such as AAA corporate debt and U.S. Treasuries provide interest income through semi-annual payments, while large-company stocks offer quarterly dividend payouts to enhance yield. Also, rather than reinvest distributions, retired investors may receive cash to bolster their income from pensions, personal savings, and government subsidies.
While they trade daily, highly graded bonds and Treasuries don’t experience the price swings that equities experience. So, the stability of the fixed-interest securities prevents wild jumps in the share price of a balanced mutual fund. Also, debt security prices do not move in lockstep with stocks—they often move in the opposite direction. This bond stability provides balanced funds with ballast, further smoothing out its portfolio’s net asset value.
Balanced funds are the same as asset allocation funds.
Advantages of Balanced Funds
Because balanced funds rarely have to change their mix of stocks and bonds, they tend to have lower total expense ratios (ERs). Moreover, because they automatically spread an investor’s money across a variety of types of stocks, they minimize the risk of selecting the wrong stocks or sectors. Finally, balanced funds allow investors to withdraw money periodically without upsetting the asset allocation. Pros
- diversified, constantly rebalanced portfolio
- low expense ratios
- little volatility
- pre-set asset allocations
- unsuited to tax-shielding strategies
- “the usual suspects” investments
- safe but stodgy returns
Disadvantages of Balanced Funds
On the downside, the fund controls the asset allocation, not you—and that might not always match with the optimal tax-planning moves. For example, many investors prefer to keep income-producing securities in tax-advantaged accounts and growth stocks in taxable ones, but you can’t separate the two in a balanced fund. You can’t use a bond laddering strategy— buying bonds with staggered maturity dates—to adjust cash flows and repayment of principal according to your financial situation.
The characteristic allocation of a balanced fund—usually 60% equities, 40% debt—may not always suit you, as your investment goals, needs, or preferences change over time. And some professionals fear that balanced funds play it too safe, avoiding international or outside-the-mainstream market and thus hobbling their returns.
Real World Example of a Balanced Fund
The Vanguard Balanced Index Fund (VBINX) has a below-average risk rating from Morningstar with an above-average reward profile. Through 10 years ending January 10, 2020, the fund, holding about 60% stocks and 40% bonds, has returned 9.54% on average with a 2.02% trailing 12-month yield. The Vanguard Balanced Index Fund has an expense ratio of only 0.18%.
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