The Lowdown on Balanced Funds

2006-07-06

Most think it seems too good to be true. How can you buy one fund and get an instant portfolio in return. But, it is true, if you pick the right balanced fund. A balanced fund essentially mixes a combination of stocks, bonds, and even in some cases cash.

Your classic balanced fund consists of about 60% stocks and 40% bonds. These figures are not set in stone, and some fund managers have some leeway to slide the blend of stocks and bonds to fit investor’s needs.

The bond holdings of balanced funds help to minimize the volatility of the stocks in the fund. This feature while holding risk in check will not perform as well as a stock fund, particularly over the long haul. For example, over the past decade, balanced funds have returned an average of 7% annually. This is about 2% lower than Standard & Poor’s 500 stock index over the same period, but with about 1/3 of the volatility.

Balanced funds are a good choice for people who don’t have the funds to adequately build a diverse portfolio on their own. They also work well for new investors who lack investment knowledge or investors who are just looking for simplicity. On the other hand, if you have lots of money to invest, you may be better served speaking with a knowledgeable broker and building a portfolio of the best stocks and bond mutual funds that fit your investment guidelines.

When chooses a balanced fund, be sure to investigate the breakdown of the fund. There are several balanced funds to choose from. Some funds consist of Blue-chip stocks some deal in foreign markets. Some funds are stock heavy while some are bond heavy carrying less than 40% stocks. Be sure to look at the fees charged per transaction and the track record of the fund manager.

Whatever you decide, take the time to research and ask questions before you jump in head first.

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