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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Balanced Fund

What it is:

A balanced fund is a mutual fund that generally keeps to a 50-50 mix of stock and bond investments

How it works (Example):

Balanced funds are one of two general types of income funds (the other type is equity-income funds, which mostly invest in dividend paying stocks). Income funds seek to generate income but give some attention to capital appreciation -- that is, capital appreciation is secondary to maintaining current income and capital preservation. 

Balanced funds (and income funds in general) are mechanically very similar to bond funds but they include varying amounts of non-debt instruments like preferred stock, common stock, or even real estate. They usually produce higher returns than money market and bond funds but are still relatively conservative, investing in securities from established, creditworthy companies that make consistent dividend payments.

But like bond funds, balanced funds can cover a broad spectrum of holdings. Some will stay heavily invested in low-risk and risk-free securities, while others will test the waters with REITs and junk bonds. It's important to read the prospectus of any balanced fund to understand the types of instruments the fund manager will invest in. 

Why it Matters:

The wide variety of balanced funds provides many alternatives to investors. In general, the volatility of balanced funds (versus very conservative investments or cash) means they are not recommended for investors who are investing for a year or less. But investors who need regular, long-term cash inflows often choose balanced funds because they can boost returns and help diversify bond-heavy portfolios while allowing for some capital growth. Reinvesting distributions can accelerate this growth, too.

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