All of us strive to achieve a certain balance in life. But one area where people find it very difficult to establish a perfect balance is finance. Often, investors fail to have a sturdy portfolio. They fail to diversify their portfolio. There may be concentrated investments in equity or in real estate etc. resulting in a roller coaster of returns and losses. This is that kind of scenario which totally calls for a more balanced approach. This is where the balanced funds come into the picture. A balanced fund is a fund which is a combination of stock as well bond and often such funds have a money market component as well in a single portfolio.
These funds are commonly known as hybrid funds and they generally reflect two types of orientation:
- Conservative orientation i.e. having a higher component of constant or fixed income
- Moderate orientation wherein the fund shows a higher stock or equity component
Ideal Investor for Balance funds
Balanced funds are ideal for those investors who wish to make an investment which is a combination of three attributes:
- Higher income
- Safety of funds
- A modest appreciation of capital
Generally stock and bond investments are in a 50-50 ratio in a balanced fund. Capital appreciation is considered to be secondary but the primary focus in case of balanced funds is on the maintenance of current income and preservation of capital.
Mechanically balanced funds are similar to bond funds but the only difference is that they include amount of non- debt instruments such as common stock or equity, preferred stock and may include real estate also. The balanced funds usually yield higher returns as compared to money market instruments. But one should read the any balanced fund’s prospectus in order to understand the different types of instruments in which the fund manager will invest.
It is considered to be safer to invest balanced funds in volatile markets. Many financial advisors are now opting to allocate assets to the balanced funds keeping in view the existing volatile economy and also due to the introduction of stringent regulatory environment in the field of financial services. The financial advisors have started allocating a considerable portion of the portfolio of their clients to balanced funds which are attributed by multi assets as compared to traditional funds which are asset specific.
Benefits of investing in balanced funds
- The balanced funds suffer lower losses as compared to the pure equity funds because of the exposure of these funds to debt and cash investments in case of a steep fall in the market. These are the tough times when the real worth of balanced funds can be understood. It does not mean at all that your assets will be completely guarded but yes, they will not go down as compared to their equity counterparts. Hence, Balanced funds are well equipped to withstand the swings and shocks of the market when it is falling or going through a difficult phase
- An ideal asset allocation is ensured when money is invested in a balanced fund since it is protected from the panic envisaged by the typical investors.
- Balanced fund protects an investor’s capital and helps in the creation of wealth.
- Balanced funds help in rebalancing your portfolio on a need basis.
- Balanced funds offer higher risk adjusted returns and that too with far lesser risk as compared to pure equity funds.
- An automatic diversification is obtained in the investment portfolio in case of a balanced fund. This is another advantage of investing in balanced funds. The investors generally wish a single portfolio which is an all encompassing alternative such that they can purchase on a regular basis, and the portfolio yields a good return and also avoids the turbulence or major volatility when the market is falling.
- Those who do not have a risk appetite for making equity investment but they wish to invest in equity then a balanced fund is the way to go.
- The best way to kick start i.e. to begin equity investment for an investor who is just beginning to make equity investment is making investments in the balanced funds.
- If an investor has already invested a major portion of his funds in equity then it is advisable to balance the same by investing in debt funds or even balanced funds.
However, the downside to balanced funds is that since it includes both equity and debt components one wishes to know their performance separately. But, balanced funds do not disclose the debt and equity performances separately. It is a minor disadvantage as opposed to so many advantages of investing in balanced funds as discussed earlier.
Hence, we can clearly note that investing in balanced funds is a wiser choice which promises handsome rewards.