What is a Balanced Fund?

What is a Balanced Fund?

A balanced fund combines equity stock component, a bond component and sometimes a money market component in a single portfolio. Generally, these hybrid funds stick to a relatively fixed mix of stocks and bonds that reflects either a moderate, or higher equity, component, or conservative, or higher fixed-income, component orientation

These funds invest in a mix of equities and debt, giving the investor the best of both worlds. Balanced funds gain from a healthy dose of equities but the debt portion fortifies them against any downturn.

Balanced funds are suitable for a medium-term horizon and are ideal for investors who are looking for a mixture of safety, income and modest capital appreciation. The amounts this type of mutual fund invests into each asset class usually must remain within a set minimum and maximum.

Risks Associated with a Balanced Fund

A balanced fund is attractive to investors with low-risk tolerance because the fund’s growth outpaces inflation and provides steady returns. While balanced funds are a comparatively conservative investment strategy, they are still not 100% risk-free because bonds will fluctuate if interest rates change.

Since bonds demonstrate an inverse relationship with interest rates, an increase in interest rates will cause bond values to fall.

Example of a Balanced Fund

The Vanguard Balanced Index Fund Admiral Shares (VBIAX) has a below-average risk rating from Morningstar with an above-average reward profile.

 The fund’s allocation consists of 60% stocks and 40% bonds. Over the past 10 years—as of April 30, 2022—the fund has returned 8.73% annually. The Vanguard Balanced Index Fund Admiral Shares has an expense ratio of 0.07% and a $3,000 minimum investment amount.

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Balanced funds are ideal for an investor who wants a combination of a low risk (investments in bonds) and a higher risk (equity investment) return profile. Diversification will lower the risk of holding only stocks or bonds, and if interest rates are not expected to increase, the bond component will not experience notable fluctuations.

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