Back to: ECONOMICS, FINANCE, & ACCOUNTING
Balanced Fund Definition
A balanced fund merges a bond component, a stock component, and occasionally a money market component all in one portfolio. Usually, these hybrid funds stick to a somewhat fixed mix of bonds and stocks which shows either moderate equity, or higher equity, conservative, or higher fixed-income, or moderate, component orientation.
A Little More on What is a Balanced Fund
Balanced funds are directed towards investors in search of a blend of income, safety, and modest capital appreciation. The amounts this mutual fund type invests into each class of asset typically must remain within a specified minimum, as well as, maximum.
Despite the fact that they belong to the “asset allocation” family, balanced fund portfolios don’t engage in a material change of their asset mix. This is different from target-date, life cycle, and asset-allocation funds that are actively managed, which change in reaction to the changing risk-return appetite of an investor and age or general investment market conditions.
Balanced funds are favored by investors with dual investment objectives. Usually, investors or retirees with low-risk tolerance use these for growth which surpasses inflation and income which augments current needs. While retirees, in general, scale back risk as they grow older, many people feel equity exposure is needed as expectations in life increase. While a balanced fund’s equity holdings tend to rely on large, big companies that pay a dividend, those issues usually offer long-term total returns which track the S & P 500 Index. Based on history, inflation has averaged approximately 3%, while the S & P 500 averaged approximately 9.8% between 1928 and 2014. Equities prevent purchasing power erosion and help in ensuring the long-term maintenance of retirement nest eggs.
A balanced fund’s bond component serves two functions: tempering portfolio volatility and creating a stream of income. Investment-grade bonds like U.S. Treasuries and AAA corporate issues offer interest income from biannual payments, while stocks of large companies provide quarterly dividend payouts in order to improve yield. In a bid to bolster income from personal savings, government subsidies, and pensions retired investors might take distributions in the form of cash.
Secondarily, Treasuries and bonds are less volatile than stocks. Bondholders have a claim against a company’s assets while stocks typify ownership, bearing every inherent risk supposing bankruptcy occurs. Therefore, prices of debt security don’t move in synchronization with equities, and wild swings in a balanced fund’s share price are prevented by stability.
Because balanced funds hardly have to change their mix of bonds and stocks, they tend to have lesser total expenses. The Vanguard Balanced Index Fund, for instance, has a 0.19% expense ratio. Furthermore, because have an automatic way of spreading an investor’s money across various stock types, they reduce the risk of choosing the wrong sectors or stocks. Finally, balanced funds for retirement permit the periodic withdrawal of money by investors without adversely affecting the asset allocation.
Example of a Balanced Fund’s Performance
The Vanguard Balanced Index Fund got a below-average risk rating from Morningstar with a reward profile that’s above average. Through ten years which ended in February 28, 2018, the fund, holding approximately 40% bonds and 60% stock, has made an average return of 7.51% with a trailing twelve-month yield of 2.08%.
References for Balanced Mutual Fund
Academic Research on Balanced Mutual Fund
Mutual fund performance, Sharpe, W. F. (1966). The Journal of business, 39(1), 119-138.
Measuring mutual fund performance with characteristic‐based benchmarks, Daniel, K., Grinblatt, M., Titman, S., & Wermers, R. (1997). The Journal of finance, 52(3), 1035-1058.
Momentum investment strategies, portfolio performance, and herding: A study of mutual fund behavior, Grinblatt, M., Titman, S., & Wermers, R. (1995). The American economic review, 1088-1105.
Mutual fund herding and the impact on stock prices, Wermers, R. (1999). the Journal of Finance, 54(2), 581-622.
Can mutual funds outguess the market, Treynor, J., & Mazuy, K. (1966). Harvard business review, 44(4), 131-136.
Performance evaluation: A case study of the Greek balanced mutual funds, Artikis, G. P. (2003). Managerial finance, 29(9), 1-8.
The value of active mutual fund management: An examination of the stockholdings and trades of fund managers, Chen, H. L., Jegadeesh, N., & Wermers, R. (2000). Journal of Financial and quantitative Analysis, 35(3), 343-368.
Efficiency with costly information: A study of mutual fund performance, 1965–1984, Ippolito, R. A. (1989). The Quarterly Journal of Economics, 104(1), 1-23.
On the timing ability of mutual fund managers, Bollen, N. P., & Busse, J. A. (2001). The Journal of Finance, 56(3), 1075-1094.
The small world of investing: Board connections and mutual fund returns, Cohen, L., Frazzini, A., & Malloy, C. (2008). Journal of Political Economy, 116(5), 951-979.
Mutual fund systematic risk for bull and bear markets: an empirical examination, Fabozzi, F. J., & Francis, J. C. (1979). The Journal of Finance, 34(5), 1243-1250.
Explaining the size of the mutual fund industry around the world, Khorana, A., Servaes, H., & Tufano, P. (2005). Journal of Financial Economics, 78(1), 145-185.