A balanced mutual fund is a mutual fund where the investments are a mix, usually consisting of stocks, bonds, and cash. The investments are spread out across a few categories to minimize risk and provide income, while still allowing for profitable growth. Some of the investments are typically safer, low-risk choices that do not grow as much, while others are higher risk choices that usually have the potential for high profit growth. The mixture of high risk compared to low varies depending on which fund is chosen. Investing in a balanced mutual fund has a variety of benefits, and a few drawbacks as well.
A mutual fund is an investment strategy where a large group of people contribute a pool of money, called capital, which is used to invest in securities such as stocks and bonds that will be owned collectively by the group. The fund is usually run by a money manager that is in charge of investing the money in a way that will produce a profit for the group. Each member of the group is a shareholder, and owns a percentage of the fund based on how much money he or she contributed to the pool.
In a balanced mutual fund, the money manager invests the money in a mixture of securities instead of just one type. This strategy of investing is supposed to prevent loss of the capital, assuming that if one investment does poorly the others will make up for it. The high-risk investments are balanced out by the low-risk investments.
Typically, stocks make up approximately 60 percent of the mixture of investments in a balanced mutual fund. Investment in stock provides the potential for tremendous growth and profits. If the right stocks are chosen, a person's investment can grow exponentially as the stock's value increases. However stocks are a high-risk investment with no guarantees, and have almost as much chance of decreasing in value. The fund's money manager should usually select a mix of proven winners that have a record of aggressive growth and are predicted to continue growing, in order to minimize risk.
The remaining 40 percent of the investments of the balanced mutual fund is most often bonds and occasionally some cash. Bonds are a relatively safe, low-risk investment with a virtually guaranteed return, but the return on bonds is much smaller than on stocks. It is a way of keeping a portion of the capital safe. The investment in bonds helps to protect against an overall net loss of the fund's value, but it is not a guarantee.
Some of the benefits of a balanced mutual fund include the lowered investment risk and simplicity of investing. Another benefit is that a knowledgeable money manager is able to monitor the market and the economy and adjust the balance of investments in the fund if needed. A couple of drawbacks are that there is still a certain amount of investment risk, and the investor has very little control over decisions concerning his or her money. Another drawback can be fees, which are frequently calculated as a percentage of the investment's earnings, and can reduce profit for the investor.