Balanced Funds

Balanced funds are special type of funds with special type of investment policy. The basic concept is to ensure that the fund achieves consistent growth (capital appreciation) while generating consistent income through balanced fund asset allocation. Because of this, balance funds are also known as asset allocation funds. These funds are unlike the regular mutual funds that focus exclusively on any sector, or on growth, or on income, or on money markets etc. Obviously, this policy entails diversification. Therefore, both risks and returns associated with balance funds are also lower.

There are different types of balanced funds, such as balanced investment funds, indexed balanced funds, tax managed balanced funds, moderate balanced fund, international balanced funds, active balanced funds, etc. These too have growth and income components complimenting each other.

The growth component is achieved by investing in common stocks. Here too, investment is well diversified so that the growth is consistent, and risk is minimal. Apart from common stock, balance funds also invest in bonds, both long and short term, and preference stocks as well. Money markets, and cash are also on the radar of the balanced funds.

Though the words balanced is used for these funds, it does not mean that the funds will be allocated equally – for example $10000 for growth, $10000 for income generating investments, $10000 in money markets, etc. Instead, the balanced funds manager ensures that the return rates and growth rates are comparable keeping in view the risk factor. This focus on proportion is responsible for steady growth witnessed in balanced funds. The funds are able to report such consistent growth, even though a couple of common stocks in which they've invested report losses at any point of time.

Balanced funds therefore develop a right composition of investment through various permutations and combinations that meet the growth expectations, and also reduce the extent of losses. Most of the time, this means 60 percent funds in stocks, and the rest in bonds and money markets. Within the funds allocated for stocks, it is divided as per sector, giving each sector some priority. Within the sector again, each stock are weighed as per growth potential, and investment is made accordingly. Obviously, more investment is in stocks that perform well. Best balanced funds are those funds that continue to show consistent growth and income even in times of adversity by reshuffling the portfolio.

Even if the optimal combination is achieved, variation in market parameters may again force the fund manager to revise the portfolio. For this, they resort to periodically liquidating stocks, and investing in bonds, and other money market instruments or vice versa when the market turns bullish. Effectively, this behavior mimics the behavior of individual investor.