What is a Balanced Fund?

Balanced Funds are ideal for investors looking for a higher level of safety, along with income and modest capital appreciation. But expense ratios for these vary widely.

Mutual Funds come in all sorts of varieties and one that has been popular with investors over the years is the balanced fund. It’s sort of a one-stop-shopping type of investment that combines both stocks, bonds and even other mutual funds.

Balanced funds are aimed at the investor looking for a higher level of safety along with income and modest capital appreciation.

“They are especially good for smaller accounts and for people who have no idea what they’re doing and no interest in learning about it,” said Derek Moran of Smarter Financial Planning Ltd. in Kelowna, BC.

Balanced funds are usually a 50-50 split between stocks – both preferred and common – and fixed income securities. But the split can be 60-40 or 70-30.

A major attraction of balanced funds is that the fixed income component, made up of low-risk government bonds, corporate bonds and a small cash position, which provide a level of safety that an investor doesn’t have when a portfolio is made up entirely of stocks.

And in a low-interest rate environment – where things have been since the 2008 financial crisis – it’s also a better way of buying fixed-income products than a straight bond fund. That’s because a high management expense ratio (MER) could seriously erode investor gains in an environment where a 10-year Government of Canada bond is only yielding about one per cent.

Of course, a major potential downside to owning a balanced fund is that your gains will be limited the next time the stock market surges 15 or 20 per cent. But then, the fixed income component will limit losses when the market tanks by a similar amount.

And because of this typical lower volatility, investors won’t be tempted to sell off when the market does inevitably stage one of its periodic corrections or selloffs.

“You could say young people should be in equities only because they have so much time, but you don’t want them, when the markets dip every seven years or so, freaking out and bailing out at the wrong time,” said Moran.

Investors are well-advised to shop around carefully before buying a balanced fund, partly because you want to know just how the split between equities and fixed income works out. But there is also a big spread in MERs. Some funds charge in the neighbourhood of two per cent while others with a performance record every bit as good can be had for under one per cent. And that difference can cost you a lot of money over the years.

“A balanced fund with a high fee doesn’t make a lot of sense any longer,” said Moran.

“You would be better off just laddering off some GICs (guaranteed investment certificates).”

Laddering refers to a popular method of buying fixed income products where you spread your money over various maturities, say over a five-year period.
It always pays to do some homework before buying any mutual fund, and a great place to visit online is Morningstar Canada.

Morningstar offers a wealth of information on funds, stocks, bonds and other securities. You can look up an individual fund and you will be able to find out the makeup of the fund, its MER, its historical performance – and how Morningstar rates it.

4 years ago