Balanced Fund

16 Jun, 2017, 11:26AM UTC by Jaydip Mehta

A Balanced Fund is a combination of a stock component, a bond component and sometimes a money market component. These are also known as Hybrid Funds. Generally, these hybrid funds stick to a relatively fixed mix of stocks and bonds that reflects either a moderate, or higher equity, component, or conservative, or higher fixed-income, component orientation. Balanced funds are very much useful for investors who are looking for a mixture of safety, income and modest capital appreciation. There is a set of maximum & minimum amount between which this type of Mutual Fund can be invested into each Asset Class. Usually they place about 60% of their assets in stocks and 40% in bonds.

Equities and Inflation

Investors having dual investment objectives generally opt for balanced funds. It provides investor with an option of single mutual fund that combines both growth (by investing in stocks) & income (by investing in bonds) objectives. Generally, Investors having capacity to bear low risk invests in these funds to outplace inflation & to meet current needs. Equities prevent erosion of purchasing power and help ensure long-term preservation of retirement nest eggs.

Income Needs

The bond component of a balanced fund serves two purposes: creating an income stream and tempering portfolio volatility. Investment-grade bonds such as AAA corporate issues and U.S. Treasurys provide interest income from semi-annual payments, while large-company stocks offer quarterly dividend payouts to enhance yield. Retired investors may take distributions in cash to bolster income from pensions, personal savings and government subsidies.

Secondarily, bonds and Treasurys hold much less volatility than stocks. Bondholders have a claim against assets of a company while stocks represent ownership, bearing all inherent risk if bankruptcy occurs. Hence, debt security prices do not move in lockstep with equities, and their stability prevents wild swings in the share price of a balanced fund.

Advantages of Hybrid Mutual Funds:

  • It enables us to switch over from one combination to the other available to a more aggressive growth oriented stocks when the market is bullish and vice versa.
  • Portfolio contains both top stocks & bonds, thus it provides diversity in true sense.

Disadvantages of Hybrid Mutual Funds: 

  • Dependent on the expertise of fund manager with respect to changes in portfolio.
  • May not give high returns as equity funds and underperform in bull market.

Contact us to know the types of balanced funds

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