Guest Author - Reshma Vyas
Should I invest for growth? Or, primarily for income? One "compromise" or middle-of-the-road approach is a balanced mutual fund. A balanced mutual fund is a type of asset allocation fund that invests in stocks (both common and preferred) and bonds which can provide income as well as capital appreciation. A balanced mutual fund is sometimes referred to as a hybrid fund.
A balanced fund essentially has three objectives: preservation of capital while striving for long-term growth of capital and current income. The precise rankings and weight of these three priorities may differ at times to accommodate shifting economic and market conditions. A balanced fund will seek to achieve its varied objectives by diversifying its holdings across a broad range of equity and debt securities based on a pre-fixed formula such as a 60% allocation to stocks and 40% to bonds. A scant remainder is generally geared towards money market instruments and convertibles. The specific weighting, however, can be restricted to a minimum or maximum for each asset class. Furthermore, the fund may restrict purchases of bonds to only those of investment-grade quality. Depending on the fund, a specific percentage may also be allocated for lower-quality fixed-income securities. The selection and purchase of equities within the mutual fund portfolio will also vary periodically as it strives to strike the optimal balance between investment risk and return. For example, the fund manager or management team may decide to purchase the stock of "undervalued" companies based on their historical earnings and valuations relative to the market if the outlook is determined to be more favorable in comparison to other investment opportunities. The fund may also allocate a certain percentage of its holdings to foreign bonds and equities. The reallocation of the portfolio may be adjusted in accordance to changing market conditions, economic and business outlook and risk management.
Since balanced funds seek to minimize volatility, they generally lag in terms of performance during bull markets. A balanced fund is unlikely to appeal to aggressive investors looking for quick, high octane investment returns. Although, balanced mutual funds are less volatile than "pure" stock funds, as they are more protective of capital preservation during market downturns in keeping with their investment objective, these funds are certainly not without risk. A balanced mutual fund, like any other fund, can experience declines in net asset value. Decline in the value of principal and investment return may be attributable to any variety and combination of causes and events. Bonds are subject to numerous risks such as call risk, credit risk, income risk, interest rate risk and prepayment risk. A generally weak business and economic climate or a prolonged bear market in a particular sector (e.g., equity market) can also negatively affect the performance and subsequent value of the mutual fund. Foreign securities are subject to additional, inherent risks such as currency risk and liquidity risk and can be affected by adverse economic and political changes and developments. Investment decisions made by the mutual fund manager or management team can also lead to fund underperformance in relation to its relevant benchmarks
Balanced mutual funds generally appeal to conservative investors who are looking for an "all-in-one" investment style that provides broad diversification across bond and stock asset classes, have a long-term time horizon and can accept some measure of market fluctuations. A balanced fund can be a core holding in a diversified, taxable mutual fund portfolio or in a tax-deferred retirement account.
For informational purposes and not intended as advice.