Balanced Fund Vs. Independent Stock and Bond Funds
While independent stock and bond funds remain true to their asset classes and do not invest across investment categories, a balanced investment fund offers investors the best of both worlds and invests in both stocks and bonds. Although balanced funds offer investors more diversity than independent funds because of their exposure to more than one asset class, investors can still achieve some level of diversification with independent stock and bond portfolios. This can be achieved by choosing mutual funds that invest in stocks or bonds with different characteristics surrounding size, region and financial health.
A balanced mutual fund directs an average of 60 percent of assets into the stock market, and the remaining 40 percent into fixed-income securities, or bonds, according to CNN Money. Traditional bond funds deliver modest but reliable income, and protect an investor's capital. Stock funds have the potential to generate the highest profits, but are volatile in nature and can cause investors losses. In a balanced fund, the risk associated with equities is offset by the stability offered by bonds.
In 2011, the average mutual fund expense ratio, or fee relative to the size of a mutual fund, fell for equity and bond funds by 4 basis points and 2 basis points, respectively, versus 2010 levels, according to the Investment Company Institute. Investing in separate stock and bond mutual funds with a front-end load feature, or sales charge, is likely to be more expensive than investing in a single balanced fund, because load funds charge upfront fees.
While balanced funds are designed to protect and grow an investor's assets, they generally do not take the risks that are necessary to potentially deliver the highest returns. In the first nine months of 2012, the Bank of America Merrill Lynch High Yield Master Two Index, which is a barometer of performance in funds that invest in bonds with a high probability for default, delivered returns of more than 12 percent, according to "The Wall Street Journal." Given the uncorrelated nature of stocks and bonds, however, investment performance in balanced funds remains consistent even through changing market conditions.
Investors who invest in independent stock and bond funds are better able to identify periods of time when either asset class is declining. As a result, investors in independent funds may be motivated to exit funds more readily than balanced fund investors. It is more difficult for balanced fund investors to recognize weakness in one investment category considering the assets classes do not typically perform similarly and losses can be hidden. As a result, balanced fund investors are more inclined to invest for the long term, attests CNN Money.
Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.