Have you ever heard about balanced funds? These are a type of mutual fund that specifically contains a whole component of bonds and stocks. Mutual funds are baskets of securities from which investors can buy as they deem fit. Generally, balanced funds contain an asset allocation of bonds and stocks that are fixed.
This fixed allocation usually takes place in a whole division with 30% bonds and 70% stocks. In fact, bonds are a type of debt instrument that most commonly pay a return rate that is fixed and stable. The objective? Any balanced mutual fund needs to be the correct blend of income and growth.
These are perfect for investors seeking the perfect blend of income, capital appreciation, and safety. Hence keep reading to find out more about the same.
Understanding Balanced Funds:
Now that you have a fair idea of what is a balanced mutual fund, let’s understand this better. But before that, let’s check out the points to remember mentioned below, about balanced funds.
|Key Takeaways: Balanced funds can be defined as a type of mutual fund that can easily invest your money across various asset classes, inclusive of a fine blend of stocks and bonds with low to moderate risk. Similarly, balanced funds can invest easily with the purpose of both capital appreciation as well as income. However, balanced funds benefit greatly from investors with low-risk tolerance like retirees by simply offering both income and capital appreciation.
Balanced funds are thus a sort of hybrid fund which is a sort of investment fund, well-characterized by diversification into either two or more asset classes. The amount invested into every individual asset class by such funds usually stays within an entire set of maximum and minimum values. These funds are also known as a fund for asset allocation.
Portfolios for such funds don’t change the asset mix materially, unlike the life cycle funds, which simply adjust all the holdings for lowering the whole risk factor while the retirement date of an investor approaches.
These also differ greatly from funds that are actively managed, which might end up evolving as a response to any investor’s changing appetite for both risks and returns or even overall conditions for market investments.
Elements Of Balanced Funds:
The elements of the best-balanced funds are as follows,
- Equity Component
- Bond Component
Let’s find out about the same in some detail.
The equity component is one element of Balanced funds that usually helps to erode the buying power while ensuring that the long-term retirement ‘nest eggs’ are preserved properly. All equity holdings from balanced mutual funds mostly lean towards large equities like the ones available within the S&P 500 Index.
The S&P 500 Index includes five hundred publicly traded large companies in the U.S. These funds also include companies that are dividend-paying by nature. If you are wondering what are dividends, then these are a type of cash payments companies pay to shareholders as a reward for owning stocks with them.
It is evident that the companies that pay dividends consistently over a long time are usually profitable and well-established.
This component of Balanced funds has two specific purposes,
- To create or even build an income stream.
- To tone down portfolio volatility, which includes the fluctuations in prices from the whole equity component.
Investment-grade bonds like the U.S. Treasuries and the AAA corporate debt are known for providing interest income via semi-annual payments. Large-company stocks, on the other hand, provide dividend payouts quarterly to enhance the yield.
Also, more than reinvesting distributions, investors who are retired might end up receiving cash for bolstering their incomes from various sources like personal savings, government subsidies, and pensions. Although these can be traded daily, the Treasuries and the ‘highly graded bonds’ do not undergo big fluctuations in the price, unlike equities.
Consequently, it is the stability found in fixed-interest securities that are responsible for preventing wild fluctuations in the share prices of balanced mutual funds. At the same time, the prices of debt security can’t move in any opposite direction. This sheer bond stability gives balanced funds the boost that it needs!
Balanced Funds: Advantages And Disadvantages
There are several advantages and disadvantages of even the best balanced mutual funds. Scroll down and check out the table below to find out the pros and cons of these funds in 2022!
|Asset allocations are fixed
|Low expense ratio
|“The usual suspects” investment
|Not suitable for tax-shielding strategies
Frequently Asked Questions (FAQs)
Ans: The best-Balanced funds are as follows,
i. Sundaram Equity Hybrid Fund,
ii. BOI AXA Conservative Hybrid Fund,
iii. SBI Dynamic Asset Allocation Fund, and
iv. ICICI Prudential Equity and Debt Fund.
Ans: Balanced funds are considered to be a safe investment since it helps investors to invest prudently without risking their money and assets in equity. These funds are either debt-oriented or equity-oriented.
Ans: Balanced funds are one of the safest investments out there. Since these enable investors to invest prudently without risking their money or even assets in equity. These funds are either debt-oriented, or they could also be equity-oriented.
Ans: The three types of mutual funds are as follows,
i. Growth Schemes or Equity,
ii. Liquid or Money Market Funds,
iii. Balanced funds,
iv. MIP (Monthly Income Plans) or Hybrid Plans, and
v. Gilt Funds.
And It’s A Wrap!
Finding the best fidelity balanced funds is perhaps a great idea, especially if you have been looking for safe investment opportunities. Yes, there are a few disadvantages of investing in these funds, but those aren’t fixable or even remotely tolerable. Investments usually come with a certain amount of risk.
Naturally, every time you choose to invest, you are saying ‘yes’ to a certain degree of risk. But that shouldn’t stop you, if the world of investments, stocks, and mutual funds attract you, then what are you even waiting for?
Don’t forget to let us know your thoughts on the same in the comments section below.