Balanced funds are a type of mutual funds which has exposure to two primary asset classes, primarily: Equity and Debt.
For example: A Mutual Fund boasting of 60% investment in stocks and 40% in bonds would be a perfect example. By diversifying into both equity and debt, a balanced fund can ensure better risk vs. reward when compared to a pure-asset fund.
Just like any other regular fund, a balanced fund is also maintained by a fund manager. This means that you can be rest assured about your investment and do not need to keep checking up on its performance day in and day out.
The concept of Balanced Funds is too good to be true. Here are 3 things you should know.
1. The perfect balance
The market is unpredictable and can change its winds at the drop of a hat. Hence, it is vital to invest in a mix of uncorrelated assets which will ensure a diversified portfolio.
For Example: If you were to only invest the Power and Steel industry, in terms of stocks, funds, and commodities, your assets would be poorly diversified. A shift in the industry and your portfolio will be worthless.
Investing in a range of different, unrelated companies as well industries will contribute towards building a great portfolio. Unlike a major chunk of mutual funds that only focus on equity or debt, a balanced fund helps to mitigate risk by diversifying across industries as well as asset classes.
If there was to be any economic up or down, it has been observed that equities tend to outperform bonds. Major companies can grow at exponential speeds, provide higher dividend pay-out as well increase their share value significantly. In contrast, bonds can only fetch return with interest.
The reverse of the same situation holds true when the economy falls. Since bonds are debt instruments, companies must by law make repayments irrespective of the market conditions. Hence, this ensures a steady flow of income no matter what the condition. The value of equity in this same case is not always favourable.
By combining both these said asset classes, balanced funds can strike the perfect balance between wealth growth and wealth preservation respectively.
The return on balanced funds though may sometimes be less than that of equity but it will be much greater than just bonds. These funds will also a fetch a return greater than inflation and ensure prosperity in difficult times.
For investors in their 40’s, balanced funds are a great idea as it lets you diversify and grow your wealth for retirement without taking huge risks and jeopardising any future financial goals.
Another plus of investing in balanced funds is that it removes the need to invest in separate funds for equity or debt. This also make it easier to assess the performance of your portfolio and execute various strategies.
2. Completely professionally managed
Balanced funds are completely managed by experienced financial professionals who have the training, intuition and skill to pick the various assets to ensure best returns possible. This is a great option to consider if you are a novice investor or do not have time to keep up the market.
Another plus by investing in this type of fund, you will not need to spend hours rebalancing your portfolio or deciding between assets. It will already be done, and that too on time. Since diversification and re-balancing needs a niche kind of knowledge, it’s better left to the professionals.
3. One for all, but not all for one
Though balanced funds seem like the best option out there, it may not be the perfect fit for every investor out there.
Since less than 50% of the balanced funds in invested in bonds, it is only likely that they will not outperform pure equity-based funds. This can be quite the hurdle for many investors. If you are in the market for active funds which can fetch higher returns, these kinds of funds may not be the first choice.
Also, if you wish to have direct control over your investments in terms of what and where should your money should be allocated, balanced funds are not the right option. If you are only looking to protect your wealth, balanced funds are also not a good option.
For Example: An investor in his late 60’s will not be focusing on growing his wealth but only in protecting it. Rather than risk, he would prefer consistent return.
Balanced funds are developed and designed for passive investors who wish to grow their wealth over a long period of time.
It has been gaining popularity over the past few years due to its many advantages such as professional management, higher returns, long-term growth and simple to use and manage system. Though, as an investor, it is important to evaluate your risk profile, financial needs and figure out if balanced funds is the right fit for you.