What is a Balanced Fund
A balanced fund combines a stock component, a bond component and sometimes a money market component in a single portfolio. Generally, these hybrid funds stick to a relatively fixed mix of stocks and bonds that reflects either a moderate, or higher equity, component, or conservative, or higher fixed-income, component orientation.
BREAKING DOWN Balanced Fund
Balanced funds are geared toward investors who are looking for a mixture of safety, income and modest capital appreciation. The amounts this type of mutual fund invests into each asset class usually must remain within a set minimum and maximum.
Although they are in the "asset allocation" family, balanced fund portfolios do not materially change their asset mix. This is unlike life-cycle, target-date and actively managed asset-allocation funds, which make changes in response to an investor's changing risk-return appetite and age or overall investment market conditions.
Equities and Inflation
Investors who have dual investment objectives favor balanced funds. Typically, retirees or investors with low risk tolerance utilize these funds for growth that outpaces inflation and income that supplements current needs. While retirees generally scale back risk as age advances, many individuals recognize the need for equity exposure as life expectancies increase. While the equity holdings of a balanced fund tend to lean toward large, dividend-paying companies, those issues typically provide long-term total returns that track the S&P 500 Index. Historically, inflation has averaged about 3%, while the S&P 500 averaged about 9.8% from 1928 through 2014. Equities prevent erosion of purchasing power and help ensure long-term preservation of retirement nest eggs.
The bond component of a balanced fund serves two purposes: creating an income stream and tempering portfolio volatility. Investment-grade bonds such as AAA corporate issues and U.S. Treasurys provide interest income from semi-annual payments, while large-company stocks offer quarterly dividend payouts to enhance yield. Retired investors may take distributions in cash to bolster income from pensions, personal savings and government subsidies.
Secondarily, bonds and Treasurys hold much less volatility than stocks. Bondholders have a claim against assets of a company while stocks represent ownership, bearing all inherent risk if bankruptcy occurs. Hence, debt security prices do not move in lockstep with equities, and their stability prevents wild swings in the share price of a balanced fund.
Advantages of Balanced Funds
Because balanced funds rarely have to change their mix of stocks and bonds, they tend to have lower total expenses. The Vanguard Balanced Index Fund, for example, has an expense ratio of only 0.19%. 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 for retirement allow investors to withdraw money periodically without upsetting the asset allocation.
Balanced Fund Performance Example
The Vanguard Balanced Index Fund has a below-average risk rating from Morningstar with an above-average reward profile. Through 10 years ending Feb. 28, 2018, the fund, holding about 60% stock and 40% bonds, has returned 7.51% on average with a 2.08% trailing 12-month yield.