What Is a Balanced Fund?
A balanced fund is a mutual fund that typically contains a component of stocks and bonds. A mutual fund is a basket of securities in which investors can purchase. Typically, balanced funds stick to a fixed asset allocation of stocks and bonds, such as 70% stocks and 30% bonds. Bonds are debt instruments that usually pay a stable, fixed rate of return.
The investment objective for a balanced mutual fund tends to be a mixture of growth and income, which leads to the balanced nature of the fund. Balanced mutual funds are geared toward investors who are looking for a mixture of safety, income, and modest capital appreciation.
- Balanced funds are mutual funds that invest money across asset classes, including a mix of low- to medium-risk stocks and bonds.
- Balanced funds invest with the goal of both income and capital appreciation.
- Balanced funds can benefit investors with a low risk tolerance, such as retirees, by offering capital appreciation and income.
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 funds, which adjust the holdings to lower the risk as an investor's retirement date approaches. Balanced funds also differ from actively managed funds, which may evolve in response to the investor's changing risk-return appetite or overall investment market conditions.
Elements of a Balanced Fund Portfolio
Retirees or investors with low-risk tolerance can utilize balanced funds for healthy growth and supplemental income. The elements of balanced funds include a mixture of stocks and bonds.
The equity component helps to prevent erosion of purchasing power and ensure the long-term preservation of retirement nest eggs.
The equity holdings of a balanced fund lean toward large equities such as the ones found in the S&P 500 Index, which contains 500 of the largest publicly traded companies in the United States. Balanced funds may also include dividend-paying companies. Dividends are cash payments made by companies to their shareholders as a reward for owning their stock. Companies that consistently pay dividends over the long term tend to be well-established and profitable.
The bond component of a balanced fund serves two purposes.
- Creates an income stream
- Tempers portfolio volatility, which is the price fluctuations from the equity component
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 usually experience wild price swings that equities may experience. As a result, 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 and can move in the opposite direction. This bond stability provides balanced funds with ballast, further smoothing out its portfolio's investment return over time.
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), which represent the cost of the fund. Moreover, because they automatically spread an investor's money across a variety of types of stocks, market risk is minimized if certain stocks or sectors underperform. Finally, balanced funds allow investors to withdraw money periodically without upsetting the asset allocation.
Diversified, constantly rebalanced portfolio
Low expense ratios
Fixed asset allocations
Unsuited for 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 the investor, which might not match an investor's tax-planning strategy. 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. Also, investors can't use a bond laddering strategy—buying bonds with staggered maturity dates—to adjust cash flows and repayment of principal according to their financial situation.
The characteristic allocation of a balanced fund—usually 60% equities, 40% bonds—may not always suit an investor's financial goals since needs and preferences can change over time. Some balanced funds play it too safe, avoiding international or outside-the-mainstream markets, which can hobble their returns.
Real-World Example of a Balanced Fund
The Vanguard Balanced Index Fund Admiral Shares (VBIAX) has a below-average risk rating from Morningstar with an above-average reward profile. The fund's allocation consists of 60% stocks and 40% bonds. Over the past 10 years—as of April 30, 2022—the fund has returned 8.73% annually. The Vanguard Balanced Index Fund Admiral Shares has an expense ratio of 0.07% and a $3,000 minimum investment amount.