Mutual Fund Site

Insofar as mutual funds are concerned, balanced funds are those all-encompassing funds that can meet an array of investment management requirements. In many cases, people who are new to investments and want to know where to invest with the least amount of risk while still enjoying an accurately built asset allocation model will start out of with balanced funds.

The reason for this is simple. Most of the balanced funds available to investors will invest in all three asset classes (cash, income and equity). Actively managed balanced funds will modulate their asset allocation in an attempt to take advantage of market pressures one way or another. This mostly means increasing income-class investments while simultaneously reducing equity class investments when equity markets are considered overbought (hot) and vice versa when equity markets are oversold (underpriced).

If we call the above types of balanced funds tactically managed funds, then we can consider another type of balanced fund where the asset allocation is already determined and the fund’s mandate is to stay the course with its asset allocation design. For example, consider a fund that promises a steady 25/75 income to equity ratio. This type of balanced fund will rebalance its asset each time the weighting exceeds a predetermined deviation from the original ratio. For example, if equities are strong and grow more than the income portfolio so that the weighting is 20/80, equities would be sold off and income investments purchased with those gains so that the weighting returns to 25/75.

In both instances, these balanced funds exist to achieve different results, therefore they exist for different investors.

Ideally, the investor who is just starting or learning to invest might prefer actively managed balanced funds where asset allocation can swing freely from one extreme to another at the discretion of the fund manager. This allows the investor to enjoy a professionally managed portfolio with little up-front investment (many of these professional fund managers would deal only with institutional investors otherwise, or people with well over $1 million in investible assets, so to take advantage of their expertise is really a treat for the novice investor).

Investors who have built a larger portfolio will begin to understand the value of sticking to a particular asset allocation model and may therefore prefer to adhere to their specific model. This means a fixed asset allocation fund will make more sense for this type of investor. That does not mean that this type of investor will need to abandon actively managed balanced funds in favor of this type of investment. However, as asset size grows, so must the attention to details insofar as the portfolio is concerned. As such, it is normally recommended that investors who have accumulated wealth under an actively managed balance fund will be urged to minimize their risk by investing in other asset classes or other investments so that there is no over-exposure to a single fund.

Ultimately, balanced funds are ideal starting points for beginning investors or people looking to enjoy the benefits of active asset management at a fraction of the cost. Likewise, strategic balanced funds where the asset allocation is strictly adhered to also make sense when investors accumulate a relatively substantial amount of wealth and wish to protect against management exposure.