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Investing is an important part of building wealth, but it can be difficult to know how to get started. One potential solution to that problem is balanced funds, which provide investors with a single fund that can meet many or even all of their investing needs.
The prevailing wisdom says that investors should hold a portfolio containing a healthy mix of stocks and bonds. Balanced funds, also known as hybrid funds, usually contain both types of assets in a single investment so that investors don’t have to do the work of trying to build a balanced portfolio on their own. Just buy one investment, and your portfolio will be diversified – and you’ll gain all the benefits of diversification.
Taking the guesswork out of investing can be invaluable to new investors. While that is the main benefit of balanced funds, balanced funds have a few other notable advantages to keep in mind.
How balanced funds work
Balanced funds spread your money across a portfolio that usually contains both stocks and bonds. For example, you might buy a balanced fund containing 65 percent stocks and 35 percent bonds. This is in contrast to mutual funds and exchange-traded funds (ETFs), which tend to focus on one asset class or the other.
Different balanced funds vary in their asset allocations. Some may favor stocks heavily (equity-oriented), while others might have a large bond allocation (debt-oriented). Others could even keep a portion of your money in cash for added safety.
To decide which fund to purchase, an individual investor should understand their own needs and risk tolerance and invest in a balanced fund to meet those needs. For example, if your risk tolerance is high, you can lean more toward stocks. If it’s lower, you might want to lean more toward a heavier bond allocation.
Top advantages of investing in balanced funds
For the right kind of investor, balanced funds can have significant advantages. Here are some of the top ones to consider.
- Easy diversification: With many brokers, you have to place trades for each investment you want every time you transfer money into your account. If you have a portfolio of even just a few mutual funds or ETFs, that may mean placing a lot of trades if you want to keep your portfolio diversified. However, balanced funds let you buy one fund that is already diversified.
- Beginner friendly: If you are new to investing, you probably don’t have the investing knowledge to know which investments are the best to meet 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 several ETFs or mutual funds, you may have to rebalance your portfolio at least quarterly, as some investments perform better than others. But if you buy a balanced fund, there’s no need to rebalance, because all of 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 positives, balanced funds have some downsides, too.
- Higher fees: Balanced funds come with 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. Those fees pay managers to oversee the fund.
- Little control over allocations: If you eventually understand more about the market, you may want to own specific stocks and bonds or have a different allocation to them. Owning a balanced fund means that someone else is making all the decisions.
- Lower volatility but lower return: By adding cash or bonds with stocks, fund managers can reduce volatility. That can be good if you need stability, but this approach also reduces your long-term returns, since stocks tend to deliver much higher returns over time. So balanced funds may be better for those who need stability rather than the highest levels of returns, making them more suited to older investors.
Bottom line
Balanced funds can be a great way to invest in the stock market, particularly if you are new to investing, since all of the work is done for you. Balanced funds smooth returns by adding bonds to a portfolio of stocks, and this approach may help reduce the chances that new investors will panic and sell their investments in a downturn, hurting their long-term returns.
