Balanced Fund Definition

A balanced fund is a mutual fund that contains a stock component, a bond component and sometimes a money market component in a single portfolio. Generally, these funds stick to a relatively fixed mix of stocks and bonds; their holdings are balanced between equity and debt, their objective between growth and income. Hence, their name "balanced."

Balanced funds are geared toward investors who are looking for a mixture of safety, income, and modest capital appreciation.

A balanced fund is a type of hybrid fund, an investment fund that is characterized by diversification among two or more asset classes. The amounts it invests into each asset class usually must remain within a set minimum and maximum. Balanced funds may also be known as asset allocation funds.

Balanced fund portfolios do not materially change their asset mix—unlike life-cycle, target-date and actively managed asset allocation funds, which evolve in response to an investor's changing risk-return appetite and age or overall investment market conditions.

Typically, retirees or investors with low-risk tolerance utilize balanced funds for growth that outpaces inflation and income that supplements current needs. Equities in a prevent erosion of purchasing power and help ensure long-term preservation of retirement nest eggs. Historically, inflation has averaged about 3% annually, while the S&P 500 averaged about 10% from 1928 through 2018.The equity holdings of a balanced fund tend to lean toward large, dividend-paying companies, as well as issues whose long-term total returns that track the S&P 500 Index.

The bond component of a balanced fund serves two purposes: creating an income stream and tempering portfolio volatility. Investment-grade bonds such as AAA corporate issues and U.S. Treasuries provide interest income from semi-annual payments, while large-company stocks offer quarterly dividend payouts to enhance yield. Retired investors may take distributions in cash to bolster income from pensions, personal savings, and government subsidies.

While they trade daily, highly graded bonds and Treasurys don't experience the price swings that equities do. So their stability prevents wild jumps in the share price of a balanced fund. Also, debt security prices do not move in lockstep with stocks—in fact, they often move in the opposite direction. This provides the fund with ballast, further smoothing out its portfolio's net asset value.

Because balanced funds rarely have to change their mix of stocks and bonds, they tend to have lower total expense ratios. Moreover, because they automatically spread an investor's money across a variety of types of stocks, they minimize the risk of selecting the wrong stocks or sectors. Finally, balanced funds allow investors to withdraw money periodically without upsetting the asset allocation.

On the downside, the fund controls the asset allocation, not you—and that might not always jive with the optimal tax-planning moves. For example, many investors prefer to keep income-producing securities in tax-advantaged accounts, and growth stocks in taxable ones, but you can't separate the two in a balanced fund, obviously. You can't use a bond laddering strategy— buying bonds with staggered maturity dates—to adjust cash flows and repayment of principal according to your financial situation. either.

The characteristic allocation of a balanced fund (usually 60% equities, 40% debt) may not always suit, as your investment goals, needs, or preferences change over time. And some professionals fear that balanced funds play it too safe, avoiding international or outside-the--mainstream market and thus hobbling their returns.

The Vanguard Balanced Index Fund (VBINX) has a below-average risk rating from Morningstar with an above-average reward profile. Through 10 years ending April 4, 2019, the fund, holding about 60% stocks and 40% bonds, has returned 10.78% on average with a 2.15% trailing 12-month yield. The Vanguard Balanced Index Fund has an expense ratio of only 0.19%.