Investing is an important part of building wealth, but it can be difficult to know how to get started. One possible solution to that problem is balanced funds, which offer investors a single fund that can meet many or even all of their investment needs.
Conventional wisdom says that investors should maintain a portfolio that contains a healthy mix of stocks and bonds. Balanced funds, also called hybrid funds, usually include both types of assets in a single investment, so investors don’t have to do the work of building a balanced portfolio on their own. Just buy one investment and your portfolio will be diversified – and you’ll get all the benefits of diversification.
Taking the guesswork out of investing can be invaluable for new investors. While that’s the main benefit of balanced funds, balanced funds have a few other notable benefits to consider.
How balanced funds work
Balanced funds spread your money across a portfolio that typically includes both stocks and bonds. For example, you can buy a balanced fund that consists of 65 percent stocks and 35 percent bonds. This contrasts with mutual funds and exchange-traded funds (ETFs), which typically focus on one asset class or the other.
Different balanced funds vary in their asset allocation. Some may have a heavy allocation to stocks (equity-oriented), while others may have a large allocation to bonds (debt-oriented). Others may even keep some of your money in cash for added security.
To decide which fund to buy, an individual investor must understand their own needs and risk tolerance and invest in a balanced fund that meets those needs. For example, if your risk tolerance is high, you may lean more toward stocks. If the price is lower, you may be more likely to opt for a heavier bond allocation.
Key benefits of investing in balanced funds
For the right kind of investor, balanced funds can offer significant benefits. Here are some of the most important ones to consider.
- Easy diversification: Many brokers require you to place trades for each investment you want every time you transfer money to your account. If you have a portfolio with even a few mutual funds or ETFs, that could mean placing a lot of trades if you want to keep your portfolio diversified. However, balanced funds allow you to buy one fund that is already diversified.
- Beginner-friendly: If you’re new to investing, you probably don’t have the investing knowledge to know which investments are best for achieving 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 different ETFs or mutual funds, you may need to rebalance your portfolio at least quarterly as some investments perform better than others. But if you buy a balanced fund, you don’t have to rebalance the fund because all 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 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.
Disadvantages of Balanced Funds
Despite the positive aspects, balanced funds also have some disadvantages.
- Higher costs: Balanced funds have higher expense ratios, the cost of owning the fund as a percentage of your investment in it, than the average stock mutual fund, especially stock index funds. These fees pay for managers to oversee the fund.
- Little control over assignments: Ultimately, as you understand more about the market, you may want to own or otherwise allocate to specific stocks and bonds. Owning a balanced fund means someone else makes all the decisions.
- Lower volatility but lower returns: By adding cash or bonds to stocks, fund managers can reduce volatility. That can be good if you need stability, but this approach also lowers your long-term returns, as stocks tend to deliver much higher returns over time. So balanced funds may be better for those who need stability rather than the highest returns, making them more suitable for older investors.
In short
Balanced funds can be a great way to invest in the stock market, especially if you’re new to investing, because all the work is done for you. Balanced funds provide smooth returns by adding bonds to a stock portfolio, and this approach can help reduce the chance that new investors will panic and sell their investments in a recession, hurting their long-term returns.
