Balanced Mutual Funds

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Balanced Mutual Funds

Many mutual funds invest mostly in stocks or bonds.  Balanced,asset allocation, and target retirement funds invest in stocks, bonds and cash.

Reasons behind these funds

  • One stop shopping – Rather than an investor buying an stock fund and a fixed income fund, they can just buy one balanced fund which will simplify their portfolio.
  • Manage risk – Funds with higher stock allocations typically experience higher volatility.  Fixed income investments tend to have lower returns but are less volatile.  Balanced funds attempt to find a happy medium where the volatility is reduced but the returns are high enough to be acceptable.
  • Market timing – Another feature of some of these funds is the ability of the fund manager to increase or decrease the allocation of either stocks, fixed income or cash – this is known as market timing.  For example is a fund manager feels like stocks are going up then they might increase the portion of stocks in their fund and decrease the fixed income and/or cash portion.  On the other hand if they think stocks are going to decrease in value then they might lower the stock allocation and increase the fixed income portion.

Things to watch for

  • High fees – Stock funds typically charge higher fees than fixed income funds so if a balanced mutual fund has both stocks and fixed income then the fees charged should be somewhere between the stock fund fees and the fixed income fund fees.  Often the fees for balanced funds are similar to that of equity funds.
  • Stocks/bonds split - Because these funds often change their asset allocations, it can be difficult for an investor to calculate the amount of stocks and fixed income in their portfolio if they own balanced funds.  It’s easier to track your allocation if you just own pure stock or bond funds.

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