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What are Balanced Funds?

Estate Planners | Monday, November 8th, 2010

Balanced Funds

Balanced funds are a great solution for investors who are looking for a combination of income, relatively low risk, and a modest appreciation in capital. Balanced mutual funds are set up in a way that combines bonds, stocks and sometimes even money market investments, all in set proportions. These funds are hybrid in nature, due to the fact that they combine several different investment methods. Depending on a person’s investment goals, there are balanced funds which are designed to maximize the fixed-income component, or the equity component of the investments. The asset mix is not changed within balanced funds, as the amount invested in each class of assets is usually required to remain within a certain designated range.

Understanding Balanced Funds

Balanced funds are designed to create low risk while providing consistent growth. Because they are made up from a mix of investments in set proportions, balanced funds provide a good deal of diversity. They usually include some common stocks in the mix, which helps to provide the growth component of the investment, without creating undue risk for the overall fund. There are often other types of stocks included as well. A combination of short-term and long-term bonds are commonly included as part of a balanced fund. Finally, many balanced funds also include cash or money market holdings as part of the investment mix. A balanced fund does not set its strategy by using equal proportions for each of the various investment components. Instead, the proportions are determined by a set strategy determined by the projected performance potential and risk factors. By taking both performance and risk into consideration, a balanced fund is designed to provide a steady amount of growth, even if one or more of the components experience a loss during a specific month. Because the investment is balanced, diversified and based upon a strategically determined mix of investment components, they provide a modest return with minimal risk. However, market changes can sometimes affect a balanced fund to the point where one component must be replaced by a similar type of investment, in order to remain profitable. Although components can be replaced over time based on the state of the market, the overall proportions of the mix are maintained, thus keeping the fund “balanced.”

Advantages of Balanced Funds

Balanced funds are a good solution for people who want an investment that grows in value while still producing an income. They are useful in both “bear” and “bull” markets, minimizing losses due to their diversity during a bear market, while providing growth during a bull market. However, it’s important to remember that they will generally produce a more modest level of growth as compared to riskier and more aggressive investments, even during a bull market. When choosing a balanced fund, it is important to choose one that meets your investment needs. Although all balanced funds are made up of a mix of investments, some are designed more aggressively with a higher proportion of growth stocks, while others are more conservative and include more bonds for income production.

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