What Are Balanced Funds?
Also called hybrid funds or asset allocation funds, balanced funds are mutual funds that hold a blend of underlying investment assets, such as stocks, bonds, and cash. The asset allocation, or “balance” of assets, remains relatively fixed and serves a stated purpose or investment style. For example, a conservative balanced fund might invest in a conservative (relatively low risk) mix of underlying investment assets, such as 40% stocks, 50% bonds, and 10% money market.
How Balanced Funds Reduce Market Risk
Balanced funds apply the timeless investing wisdom of diversification. When you diversify with investments, you are buying and holding securities with differing performance behaviors and risk profiles. The best diversification practices usually involve holding investments that are not highly correlated to each other. In different words, to do a good job of building a diversified portfolio of mutual funds, you’ll need a combination of fund types, such as stocks and bonds for a simple example, that do not perform identically to each other. This is what balanced funds do for investors: they enable them to buy one fund that is already diversified. The only real work involved for investors is to choose the best-balanced fund that fits their investment objective and risk tolerance.
Types of Balanced Funds
There are three primary types of balanced funds:
Best Balanced Funds to Reduce Volatility
By their balanced design, all types of balanced funds can reduce volatility, as compared to a portfolio that is comprised of 100% allocation to stocks. Therefore the “best-balanced fund” for any given individual investor will depend on that investor’s investment objective and tolerance for risk. However, in general, the funds that can perform best in bear markets, when stock prices fall more than 20%, is conservative balanced funds. One of the best conservative balanced funds in the mutual fund universe is Vanguard Wellesley Income (VWINX), holding a 60/40 portfolio of bonds to stocks. In 2008, when the S&P 500 index had a massive drop of -38.5%, VWINX had a more tolerable return of -9.8%. Although a negative return is not a welcome experience for conservative investors, Wellesley’s 2008 performance was much better than that of other funds in its same category, which lost 18.61% on average. Fast forward to 2019 and you can imagine how this fund can help you survive the next bear market. If you don’t mind taking a bit more risk, one of the best moderate allocation funds is Vanguard Wellington (VWELX), which has an allocation of approximately 65% stocks and 32% bonds.
The Bottom Line
Investors should keep in mind that the asset allocation for balanced funds remains relatively fixed. Therefore, they shouldn’t be confused with target-date retirement funds, which have allocations that change over time. Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.
