What is a balanced fund?
A balanced fund is a fund in which investment is made in combination of equity class and debt class capital to ensure both income and capital appreciation on investment while avoiding excessive risk. In such investment, a mutual fund usually buys a combination of common stock, preferred stock, bonds, and short-term bonds. In other words, balanced funds reflect single mutual fund providing combined benefits of investment in stocks (for growth) and bonds (for income).
Key features
Balanced funds offer balanced solutions for those seeking stability and growth from their investment. Some of the peculiar features of such funds are as follows:
�Balanced fund seeks to optimize the risk-adjusted return by distributing assets between equity and debt capital.
�Such funds belong to “asset allocation” family. The amounts that such a mutual fund invests into each asset class usually must remain within a set minimum and maximum.
�Generally, an average balance fund maintains a 60:40 equity debt ratio, which means 60% of investment in equity and rest in debt capital. However, equity allocation in such funds can go up to 80% in bullish markets and even go down to 65% in bearish markets. Such allocation tends to reduce volatility of return by managing downturns in the stock market without too much of a loss.
�By investing in equity for capital appreciation and debt for stable returns, you can reduce instability of returns by increasing / decreasing exposure to various markets, based on in-depth research and analysis.
Investor Profile
Balance fund schemes provide benefits of both equity and debt scheme in a single fund investment. These funds are usually opted by
A) Investors looking for debt plus returns
B) Investors considering reasonable returns with equity and lower risk through diversification
Thus, balanced funds provides the twin benefits of growth from equity markets and steady income from debt market as well as lower volatility of returns and lower risk through diversification.
Most of us want to invest in top performing mutual funds to get best return out of our investment. In order to invest in right investment scheme, it is essential to understand different risks and rewards associated with each mutual fund. Generally, higher the risk, higher is the return associated with a mutual fund. Basically, there are three types of mutual funds:
1) Equity funds: Such funds principally invest in stocks. Such funds basically aims to maximize long-term returns from an optimally diversified portfolio invested in equity funds and related securities.
2) Fixed-income funds: A fixed income mutual fund promises a fixed rate of return and less of a risk than other mutual fund investments. In such funds, money is primarily invested in government and corporate debt. While fund holding may increase in value but the basic purpose of such scheme is to provide current income on a steady basis to investors.
3) Money market funds: It is an open fund in which money is invested in different equity and debt securities in money market such as Treasury bills, certificates of deposit, and commercial paper. The core goal of such investment is to preserve capital along with modest capital gains.
In order to make right investment, investor must define his or goals and desires in relation to the money invested. Whether one desires for capital gains or a current income, identifying investment goal helps to make right investment decision.
