What are balanced funds and how do they work?
Balanced funds are mutual or exchange-traded funds (ETFs) that offer a combination of stocks, bonds and sometimes other assets such as cash and real estate.
The ratio of stocks to bonds is usually predetermined and is managed actively by fund managers.
A balanced fund’s greatest appeal is it offers a mix of different asset classes, which helps reduce risk, compared with investing in an individual stock or bond fund. The most common balanced fund is the 60/40 mix of stocks and bonds, but some may hold higher or lower proportions of the two asset classes.
When evaluating a balanced fund, investors should consider the expenses associated with the fund, the historical performance of the fund, the underlying assets in the fund, and how actively or passively the fund is managed.
Balanced funds are sometimes referred to as asset allocation funds, hybrid funds, all-in-one funds, or target date funds.
Examples of balanced funds
- Vanguard Balanced Index Fund
- Fidelity Balanced Fund
- BlackRock LifePath Index Funds
Benefits of investing in a balanced fund
Pros
- Diversification
- Lower volatility
- Reduction in stock market risk.
- Balanced funds also offer built-in asset allocation, as opposed to building a portfolio of individual stocks and bonds. This can make them a great choice for investors who want to save time and hassle when constructing their portfolios.
Disadvantages of investing in balanced funds
- Balanced funds may not outperform specific investments like individual stock or bond funds.
- They could also be focused on large-cap or domestic stocks and bonds, leaving out other investment opportunities such as international stocks, corporate bonds, REITs, or small-cap stocks.
- Finally, the fund manager’s ability to make good decisions can have a major impact on their performance.
What is the purpose of balanced funds?
Overall, balanced funds are an attractive option for investors looking for an easy way to build a diversified portfolio.
With broad diversification, lower volatility, and less management, balanced funds can be a great choice for many people. However, it’s important to evaluate each fund based on its associated costs and investment objectives.
Are balanced funds a good investment?
Whether they are a good investment or not depends on the individual investor’s goals and circumstances.
Balanced funds offer diversification, lower volatility, and less management compared to individual stock and bond funds.
This could make them a good choice for investors who want to save time and hassle when constructing their portfolios.
However, it’s important to evaluate each fund based on its associated costs and investment objectives before making a decision.
Are they good for retirement?
Yes, balanced funds can be a great option for investors saving for retirement. Since the mix of stocks and bonds is set and managed by a fund manager, it takes away a lot of the hassle involved in building a portfolio of stocks and bonds.
They also offer diversification, lower volatility, and reduced stock market risk, which can make them an appealing choice for investors looking for a simpler way to save for retirement.
Points to note before investing in balanced funds
- When evaluating a balanced fund, investors should also consider whether the fund is actively or passively managed.
- Active funds are managed by experienced fund managers who make decisions intended to outperform the market, while passive funds are held in line with an index that tracks the market.
- Investors may also want to research the historical performance of the fund before investing.
Detailed example of a balanced fund
The Vanguard Balanced Index Fund (VBINX) is a real example of a balanced fund. This fund is composed of 60% stocks and 40% bonds and is managed actively to stay in line with the target allocation. Investors can access this fund through mutual or exchange-traded funds.
According to Morningstar, over the last 10 years, Vanguard Balanced Index Fund (VBINX) has returned an average of 5.02% annually. The expense ratio of Vanguard Balanced Index Fund (VBINX) as of April 2023 is 0.13% and the minimum initial investment amount is $3,000.
