The basics of balanced funds
E*TRADE from Morgan Stanley10/11/21
Summary: Balanced funds are considered the workhorses in many investors’ portfolios. They consist of stocks, bonds, and cash—making them classic portfolio diversifiers. We dig into key characteristics and investor considerations.
Balanced funds are a type of mutual fund or exchange-traded fund (ETF) that offer a simple approach to portfolio diversification. These funds typically invest in a fixed allocation of stocks (whether all US or a mix of US and international), bonds, and cash or cash equivalents and aim to meet a certain investment objective as stated in the fund’s prospectus, but the portion invested in each of these components can differ.
Striking the right balance
There are many flavors of balanced funds, helping investors across risk tolerance levels cut down on hands-on management. Depending on its allocation strategy, a fund may be considered:
- Conservative: A conservative balanced fund generally invests in a higher portion of bonds, providing income potential but less growth opportunity.
- Moderate: A moderate balanced fund typically targets a generally equal allocation of stocks and bonds, with a goal of capital appreciation and income generation.
- Aggressive: These funds allocate a significant portion to stocks and less to bonds, with a main objective of growth and appreciation.
When a fund strays too far from its target asset mix, the fund manager will rebalance back toward its objective.
Target-date funds vs. balanced funds
Some investors may confuse balanced funds with target-date funds, which have similar characteristics, but also material differences that are important to understand. While both types of funds offer a one-stop approach to diversifying across equity and fixed income, balanced funds have a set asset allocation based on a target risk strategy or defined investment objective.
Target-date funds, on the other hand, are typically designed with a retirement investor in mind. An investor can choose a “target date” for the fund that aligns with their anticipated retirement age. The fund is actively managed and is rebalanced over time from a growth-oriented strategy to an income-oriented strategy—aligning with a retiree’s traditional risk profile, which generally becomes more conservative over time.
Before incorporating a balanced fund into a portfolio, investors should consider it in the context of their entire strategy. Investors can risk becoming overweight in a particular asset class or holding—and inadvertently make their portfolios more aggressive or conservative. Also, the time horizon for the money invested into the fund is an important factor to consider. That said, balanced funds can be a simple way to diversify and spread exposure to risk.
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