What is Balanced Fund
The term “balanced fund”refers to the hybrid financial instrument wherein the fund is invested in a mix of both equity and debt at certain specific ratios. This type of fund offer moderate return at a relatively lower which in turn help investors in diversifying their investment portfolio. Given that a balanced fund maintains a balance between both equity and debt, they offer one of the best poise for risk-reward and generate an optimum return on investment. A balanced fund is also known as a hybrid fund.
A balanced fund is characterized by diversification of investment among multiple asset classes. Generally, the proportion of the fund that can be invested into each asset class is governed by the limit of minimum and maximum value set for the fund. In other words, the asset mix in a balanced fund doesn’t change materially, unlike most other asset allocation funds wherein the asset mix changes with the changes in the investor’s risk-return appetite or overall investment market condition. A typical balanced fund has 60% of the fund allocated to stocks, while the remaining 40% in invested in bonds.
Purpose of the Balanced Fund
A balanced fund has two components – equity and bond –and each component serves different purposes. First, the equity component of a balanced fund helps in the protection of the investor’s purchasing power. On the other hand, the debt component of the fund helps in generating a steady source of the secondary income stream, while it alsoaids in neutralizing the volatility of the investment portfolio.
Which are Best Balanced Fund
Now, let us have a look at some of the best balanced fund available across the globe:
- Rowe Price Balanced (RPBAX): This fund has an above-average risk rating with an above-average return profile as per Morningstar. In the last 10 years as of August 31, 2020, the fund’s equity allocation has varied in the range of 50% to 70%, while it has generated return of 9.80% on an average with standard deviation of 9.46. The expense ratio of the fund is 0.58%, which is below average.
- Dodge & Cox Balanced (DODBX): This fund has a high risk rating with an above-average return profile as per Morningstar. In the last 10 years as of August 31, 2020, the fund’s equity allocation has varied in the range of 50% to 70%, while it has generated a return of 10.22% on an average with a standard deviation of 11.37. The expense ratio of the fund is relatively less at 0.53%.
- American Funds American Balanced A (ABALX): This fund has a below-average risk rating with ahigh return profile as per Morningstar. In the last 10 years as of August 31, 2020, the fund’s equity allocation has varied in the range of 50% to 70%, while it has generated a return of 10.61% on an average with standard deviation of 8.46. The expense ratio of the fund is relatively less at0.59%.
Who Should Invest in a Balanced Fund
Given the risk-reward profile of a balanced fund, such investment would be ideal for investors who:
- Seeks a steady and stable return with a medium term investment horizon (say 5 years)
- Is a new investor with very limited knowledge about investment and market conditions
- Wishes to diversify their investment portfolio
In short, if an investor wants to avoid unnecessary risks and earn above average returns, then investment in the balanced fund is a very good option.
A conservative fund invests far less in equities and more in bonds that results in low risk and low returns, while an aggressive fund goes heavy on equities, and a nominal allocation goes to bonds that result in high returns at high risk. In such a scenario, a balanced fund takes the middle way such that it allows the investor to create an allocation that ensures relatively lower risk than an aggressive fund and relatively higher return than a conservative fund. Effectively, it offers the benefit of both debt and equity accounts, but in a balanced way as the name suggests.
Some of the major advantages are as follows:
- This investment scheme allows fund managers to migrate between equity and debt without any creating any tax liability for the investors. Otherwise, the investors would be liable for capital gains tax.
- Investment in such hybrid fund results in diversification of risk of equity funds by the debt instruments. In fact, at times market volatilities the fund managers can easily migrate between the two asset classes.
- This type of fund aids in maximizing returns while providing a safety net against market-related risks.
- The debt component of global funds can act as a hedge against inflation, which is applicable to the investor’s own country.
Some of the major disadvantages d are as follows:
- Contrary to what most believe, balanced fundis not entirely risk-free as invariably 50% to 65% of any balanced fund is exposed to the equity market.
- The investors have nosay in the choice of funds as all decisions are taken by the fund manager.
- In times of bull run, most funds underperform the equity mutual funds.
- A balanced fund charges a higher fee as the team of fund managers have to research and analyse both debt and equity market equally to generate optimum returns.
So, it can be seen that a balanced fundis a very useful financial instrument that can be used to create wealth while maintaining low risk level. However, the safety net of low risk comes at a cost wherein the accumulation of wealth has to be done with mediocre returns. Thus, it is important that before investing in a balance fund an investor should understand the risk-reward profile of the fund and map it with their own risk appetite and investment goal.
This is a guide to Balanced Fund. Here we also discuss the introduction and purpose along with advantages and disadvantages. You may also have a look at the following articles to learn more –