Investing is an important part of building wealth, but it can be difficult to know how to get started. Balanced funds aim to solve that problem by providing investors with a single fund that can meet all of their investing needs.
The prevailing wisdom says that investors should hold a portfolio containing a healthy mix of stocks and bonds. Balanced funds, also known as hybrid funds, usually contain both types of assets in a single investment so that investors don’t have to do the work of trying to build a balanced portfolio on their own. Just buy one investment, and your portfolio will be diversified – and you’ll gain all the benefits of diversification.
Taking the guesswork out of investing can be invaluable to new investors who are just getting started with investing. While that is the main benefit of balanced funds, there are a few other notable advantages to keep in mind.
How balanced funds work
Balanced funds spread your money across a portfolio that usually contains both stocks and bonds. For example, you might buy a balanced fund containing 65 percent stocks and 35 percent bonds. This is in contrast to mutual funds and exchange-traded funds (ETFs), which tend to focus on one asset or the other.
Different balanced funds vary in their asset allocations. Some may favor stocks heavily (equity-oriented), while others might have a large bond allocation (debt-oriented). Others could even keep a portion of your money in cash for added safety.
Thus, for an individual investor the goal is to understand your own needs and risk tolerance and invest in a balanced fund to meet those needs. For example, if your risk tolerance is high, you can lean more toward stocks. If it’s lower, you might want to lean more toward a heavier bond allocation.
Top advantages of investing in balanced funds
For the right kind of investor, balanced funds can have their advantages. Here are some of the top ones to consider.
- Easy diversification: With many brokers, you have to place trades for each investment you want every time you transfer money into your account. If you have a portfolio of three or more mutual funds or ETFs, that means placing a lot of trades. However, balanced funds let you buy one fund that is already diversified.
- Beginner friendly: If you are new to investing, you probably don’t have the investing knowledge to know which investments are the best to meet your goals. Balanced funds have a team of experts behind them with extensive knowledge of the best investments on the market.
- Eliminates rebalancing: If you manage your own portfolio and invest in several ETFs or mutual funds, you may have to rebalance your portfolio at least quarterly as some investments perform better than others. But if you only buy one balanced fund, there’s no need to rebalance, because all of that work is done behind the scenes.
- More consistent returns: One of the problems with investing heavily in the stock market is volatility. All that volatility can cause some people to panic and sell their investments, hurting the long-term growth of their portfolios. Balanced funds add bonds and perhaps other assets to help reduce volatility, and can help you stay invested in a downturn.
Balanced funds can be a great way to invest in the stock market, particularly if you are new to investing. This is in part because all of the work is done for you, so you don’t have to spend countless hours acclimating yourself with potential investments. At the same time, balanced funds smooth returns by adding bonds and sometimes other investments, like cash. Smoother returns reduce the chances that new investors will panic and sell their investments in a downturn, hurting the growth of their portfolios.
But balanced funds have drawbacks, too. For one, their fees can be on the high side – higher than the average fee for stock mutual funds. Also, as you gain more investing knowledge, having your investments managed for you could become more of a burden. After all, with balanced funds, you don’t have any control over your allocation of stocks versus bonds, or the specific stocks and bonds you buy. Lastly, while these funds can reduce your portfolio’s volatility, they don’t completely eliminate risk.
Thus, balanced funds can be a good choice for new investors, but it’s important to keep in mind some of the drawbacks that can also come with this type of investment. For more experienced investors, it might make sense for them to manage their own investments instead.