What Is A Balanced Fund?

What is a balanced fund? A balanced fund is a mutual fund that maintains a balanced portfolio of bonds, preferred stocks and common stocks or money-market instruments. According to Michelle Smith and the...

According to Michelle Smith and the Mutual Fund Education Alliance, a balanced fund is "A mutual fund that maintains a balanced portfolio of bonds, preferred stocks and common stocks or money-market instruments." Balanced funds are a great way to get starting with investing for whatever the reason. With one purchase, you have a portfolio that is ready to go with a diversity of securities.


If your investment personality leans towards the type who is constantly checking on how the fund is doing, these are a good choice. They have fewer bumps than other types of funds and investments. When checking on the share prices, you will find fewer changes. One of the reasons for the smoother ride is the mix of bonds and other money-market type securities. Funds that contain predominately or purely stocks tend to flux with the market and can be a rough ride at times.




Another name you may see instead of balanced fund is hybrid fund or even equity income fund. The Mutual Fund Education Alliance and Michelle Smith have this to say about equity income funds, "Equity income funds seek high current yield by investing primarily in equity securities of companies which pay high dividends. Unlike interest payments on bonds, dividends on equity securities can change as companies raise or lower their dividends. Since yield-oriented stocks are more volatile than comparably rated fixed-income securities, equity income funds offer less stability of principal than fixed-income funds."

The combination inside a balanced fund varies according to the target and the aim of management. Management will hold different balances to mitigate risk and provide capital appreciation. A conservatively balanced fund may have less than 30% of its total in equities. To add aggression to a fund, the manager may add foreign stocks and other current 'hot' markets.

One thing to watch out for if you are investing outside of a retirement account is the taxes on a balanced fund. Taxes can be high if you are in an upper income bracket or your state has high taxes. You will need to investigate if a standard balanced fund suits your tax status. If not, you can build your own balanced fund using municipal bonds, which happen to be free from federal taxes. If you do not have the desire or skill to build your own balanced fund to handle a tax issue, look for a fund that addresses this issue. There happens to be Vanguard Tax-Managed Balanced fund (VTMFX), which uses federal tax-exempt returns.

If you are familiar with Morningstar, they divide how they classify balanced funds into 'conservative allocation' and 'moderate allocation'. Conservative allocation balanced funds are useful for your goals if you need to meet them in less than five years. Moderate allocation balanced funds work for goals that are a decade or more away, because there is a bit more risk because they carry more stocks.

Therefore, a balanced fund will handle a downturn in the market fairly well. On the other hand, in a fast moving upward market, you may not grow as much as the market. They are a great vehicle for many situations and investors.

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