Balanced funds allow investors to capitalize on market conditions by diversifying their holdings in both bonds and equities.
Most mutual fund investors typically choose their mutual fund investments based on risk tolerance. While there is certainly nothing wrong with this approach, it does limit your ability to properly diversify your investments. Granted, understanding your risk tolerance is paramount to choosing any investment vehicle, mutual fund or otherwise. Unfortunately, for those who are termed “risk averse”, building significant long-term growth on safe investments alone is often extremely difficult. Consequently, putting all your money into equities can also become problematic. This is especially true given the recent global recession. However, there is one type of mutual fund that provides you with immediate diversification. Balanced funds allow investors to capitalize on market conditions by diversifying their holdings in both bonds and equities.
How Do Balanced Mutual Funds Work?
Balanced mutual funds typically hold a percentage of value in cash, and make it a point to invest in equities, bonds, and even T-bills. The approach is to match the mutual fund’s investment with market conditions. Like the name implies, the balanced mutual fund must find an appropriate balance between stable & secure investments, versus riskier, higher return ones. The mutual fund manager has to manage risk versus return. As such, your money is protected against being too much into equities, when equities aren’t performing, and too much in bonds, when equities are growing. If equities and stocks are growing, the balanced mutual fund could hold as much as 60% to 70% of your money in equities. Conversely, if equities and stocks are underperforming, the mutual fund manager may opt to switch the percentages in favor of bonds, T-bills, and cash.
How Do You Know What Balanced Fund to Choose?
Choosing a balanced fund need not be complicated. While previous performance is no guarantee of future performance, it’s still a good idea to review the fund’s management approach, the fund’s manager, and his/her experience, and the fund’s performance over time. Next, be sure to match your risk tolerance with the fund’s investment approach. Almost every mutual fund prospectus, or yearly report, will provide insight into the fund’s investments and a breakdown of how much is held in securities and equities, versus bonds and cash. Be sure to match your risk tolerance with the stated objective of the mutual fund. Take the time to read the prospectus and be cognizant that the fund manager may decide to alter the fund’s approach given the market’s strength, or lack thereof.
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