Investors who need quick returns and at the same time need safety from market fluctuations should consider investing in ‘balanced mutual funds’. It removes the disadvantages and difficulties that lies in investing in stocks and bonds and invests in a portfolio of bonds and stocks depending upon the investors’ risk profile. Hence returns as well as income can be achieved at the same time by investing in balanced mutual funds.
What is a ‘balanced mutual fund’?
A Balanced fund is a mutual fund which invests in a balance of common stock, bonds and preferred stock with an objective of income provision and some capital appreciation with low risk. So investing in balanced mutual funds provides the returns of stock market as well as the safety and regular income of bonds. Balanced mutual funds are also called as ‘hybrid funds’ or ‘asset allocation funds’.
How do you get the returns?
Although mutual funds are better and safer places to invest than the stock market, they are also subject to the fluctuations of the market. But Balanced funds try to address this problem and provide a high and stable return.
• These funds invest about 60-65% of their money in stocks. Sometimes, it my go up to 70% also. While investing in stocks, they choose the sector that has consistently clocked high growth over the past few years and invest in securities in those sectors.
o Asset allocation within the sector will also be based on fundamentals of the organizations in the sector.
o The top security in the sector may be allocated 10% of the total money and lesser the potential lesser will be the amount invested and so on.
o These funds will invest in many sectors so that the portfolio will be diversified and losses minimized.
• Investments in bonds will typically be around 40% of the total money. More aggressive funds will allocate even lesser.
o The investment in bonds ensures some cushion for the investors’ money and provides safety. At the same time, investors will also get regular income by way of coupon payments from bonds.
o Bonds issued by the government and banks will mainly form the bond portfolio of these funds. Sometimes, highly rated corporate bonds and municipal bonds may also be included.
Why are Balanced funds better than many other types of funds?
1. They provide regular income and allow your capital to appreciate which may not be possible for many other types of funds
2. Depending on investors’ risk tolerance, the type of allocation can be chosen – it may be 70:30 stocks or 60:40 bonds or whichever suits the investors’ risk profile.
Most Balanced funds are flexible in their asset allocation. They keep their options open and change the allocation based on market condition and/or as per regulations required.
The only thing that investors must watch is whether the tenure of the bonds is acceptable for them. (Tip: Long term bonds earn significantly more than short term bonds).
These funds have performed significantly in recent years. They have shown returns as high as 20% or more. Their performance has come irrespective of market conditions (both in bull markets and bear markets).
Hence, hybrid funds are something that investors can look forward to invest. However there are many more alternatives to invest. To know about investing in mutual funds visit Investing in Mutual Funds and to get an idea as to how mutual funds work visit Mutual Funds. Also visit Exchange Traded Funds to know about exchange traded funds
Dilip Mohan, young & dynamic has had exposure divergent fields- from astronomy to wireless local loop. He is sharp and quick to grasp complex concepts. His interest expands to management. He has a flair for finance with an MBA degree in a reputed institute and paternal banking background. To check out his website click <a href = "http://www.mutualfundforu.com">www.mutualfundforu.com </a>
