Balanced funds (also known as unit trusts) are a way to get a diversified portfolio of equities and bonds by investing in just one investment.
A common example would be a fund that invests 60% in stocks, and 40% in bonds. By diversifying with both equities and bonds, a balanced fund can have a better risk/reward profile, as compared to a pure equity or bond fund.
Like regular funds, balanced funds are overseen by a fund manager. This means that, as an investor, you can treat them as a passive investment. There's no need to monitor the market and make decisions on which assets to buy or sell - the process is entrusted to a full-time financial professional.
Benefits of investing in balanced funds
1) Diversification
To protect yourself from downturns in the market, it’s important to invest in a mix of uncorrelated assets. For example, investing in a gold mining company, a jewellery company, and physical gold, concentrates your risk exposure to one commodity. A downturn in the gold market could wipe out the bulk of your portfolio.
As such, it’s crucial to invest in a range of different, unrelated companies, as well as in a mix of different assets. Unlike funds that focus only on equities or bonds, balanced funds mitigate risk by diversifying your investments in two ways:
- Across many different companies, &
- In both equities as well as bonds.
Should a downturn occur in one industry, you can rest easy knowing that you're also invested in other, unrelated companies.
Likewise, the bond market often has an inverse relationship to the equities market. If the stocks are not doing well in the balanced fund, the bond holdings could compensate for it, and vice versa.
2) Professionally managed by experts
Balanced funds are managed by financial professionals, who pick the assets to ensure the fund performs well. If you're new to investing or do not have a lot of time, this is an option to consider.
You won't need to spend hours rebalancing your portfolio, or picking out available assets. Investing in such a diversified portfolio requires significant resources and personal and emotional commitment.
3) Balance between wealth growth and wealth preservation
During economic upturns, equities tend to outperform bonds. Companies grow faster and provide higher dividend payouts, while their share values increase. Equities have unlimited upside, while bonds can only return capital with interest.
During economic downturns, the reverse often becomes true. Bonds are debt instruments, so companies must make repayments regardless of market conditions. This ensures a solid income stream to bondholders, even when the market is bad.
By combining bonds and equities, balanced funds strike a position between wealth growth and wealth preservation. Balanced Funds can provide returns that may be lower than equities, but are generally much better than bond returns. These returns generally outpace the inflation rate. At the same time, the bonds component ensures a balanced fund can protect your existing wealth, even when times turn difficult.
Overall Balanced Funds tend to have higher returns per unit of volatility than bond or equity funds, that is what we mean by risk/reward profile.
This makes balanced funds a good choice for investors in their 40s, who have a need to shore up their retirement funds. Balanced Funds can continue to grow your wealth, without taking big risks with your accumulated savings.
4) Reduces the need to own multiple funds
When you invest in a balanced fund, it removes the need to invest in separate equity funds and bond funds. It's also easier to monitor the performance of your portfolio, as there's no need to interpret the returns from multiple unit trust products. You just need to track the performance of your balanced fund.
Disadvantages of investing in balanced funds
1) Slower returns compared to pure equities funds
A sizeable portion of a balanced fund is invested in bonds. As such, they are unlikely to outperform a pure equities fund over a long investment horizon (e.g. 20 or 25 years). If you’re looking for a more active product, then balanced funds are not for you. Balanced funds are better suited to investors who want to take lower risks while still growing their retirement savings.
2) Not well suited to Do-It-Yourself (DIY) investors
Balanced funds are run by qualified fund managers. Investors do not have direct control over which assets are bought or sold. Balanced funds, like all unit trust funds, are designed for investors who seek passive means of managing their wealth.
3) Not for investors who are purely focused on wealth protection
Some investors are focused purely on protecting their wealth.
For example, if you are a retiree in your 70s, you would want to focus on protecting your remaining wealth, rather than risking it for growth. Investing in equities (whether by directly buying stocks, or buying funds with a large equities component) could subject your remaining wealth to unwanted risk.
For such investors, it is more appropriate to consider buying a pure bond fund or just buying bonds directly.
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Disclaimers and Important Notices
This article is for information only and should not be relied upon as financial advice. Any views, opinions or recommendation expressed in this article does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability. This article is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.
