Balanced Funds: What They Are, How They Work, Types, and Examples


Balanced funds are a versatile investment option that combines low- to medium-risk stocks and bonds to provide investors with both capital appreciation and income. In this comprehensive guide, we delve deep into balanced funds, offering a thorough understanding of their elements, advantages, disadvantages, and real-world examples. From retirees seeking stability to cautious investors, this article provides invaluable insights into making informed decisions about balanced funds.

In the realm of investment options, balanced funds emerge as a beacon of versatility, striking an impeccable balance between safety and growth. Unlike many other investment avenues, balanced funds offer investors the best of both worlds by incorporating a blend of low- to medium-risk stocks and bonds into their portfolios. In this comprehensive exploration of balanced funds, we will embark on a journey to uncover their intricacies, benefits, drawbacks, and practical applications.

Understanding balanced funds

Balanced funds, often referred to as hybrid funds, are a subclass of mutual funds renowned for their diversified approach to investing. What sets them apart is their strategic allocation of assets across multiple classes, with a specific focus on stocks and bonds. These funds adhere to a predetermined range for each asset class, which helps maintain a stable asset mix. Another term synonymous with balanced funds is “asset allocation funds.”

Balanced funds stand in contrast to life-cycle funds and actively managed funds. While life-cycle funds adjust their holdings based on an investor’s proximity to retirement, actively managed funds undergo frequent portfolio changes driven by market conditions and risk preferences.

Elements of a balanced fund portfolio

Balanced funds cater to a diverse array of investors, from retirees aiming for steady growth to those with a cautious approach to investment. A critical facet of these funds lies in their portfolio composition, consisting of two primary components: stocks and bonds.

Equity component

The equity portion of a balanced fund serves a vital role in preserving the purchasing power of investments and ensuring the long-term safeguarding of retirement funds. Typically, this component features large-cap stocks, often mirroring the S&P 500 Index—a benchmark comprising the largest publicly traded companies in the United States. In addition to these, balanced funds may include dividend-paying stocks, providing investors with a reliable stream of income. Companies with a consistent history of dividend payments are usually well-established and financially robust.

Bond component

The bond component of a balanced fund carries a dual responsibility:

  1. Creates an income stream: It generates a steady income stream through interest payments, primarily from investment-grade bonds like AAA corporate debt and U.S. Treasuries.
  2. Tempers portfolio volatility, which is the price fluctuations from the equity component.

Furthermore, bond prices often move in the opposite direction to stocks, further enhancing the stability of balanced funds. Retired investors, in particular, benefit from receiving cash distributions to supplement their income from pensions, personal savings, and government subsidies.


Here are the advantages and disadvantages of balanced funds:

  • Diversified, constantly rebalanced portfolio: These funds maintain a diversified portfolio of stocks and bonds, reducing the risk associated with individual securities. Regular rebalancing ensures that the portfolio aligns with the predefined asset allocation.
  • Low expense ratios: Balanced funds typically feature lower total expense ratios (ERs) compared to actively managed funds. This translates to cost savings for investors over the long term.
  • Less volatility: Balanced funds provide stability and reduced volatility compared to investing exclusively in equities. This quality makes them suitable for risk-averse investors looking for a balanced approach to wealth accumulation.
  • Low risk: Given their conservative asset allocation, balanced funds are considered low-risk investments, making them particularly attractive to retirees and cautious investors.
  • Fixed asset allocations: Investors have limited control over the asset allocation within balanced funds, which may not align with their specific tax-planning strategies.
  • Unsuited for tax-shielding strategies: These funds may not allow investors to segregate income-producing securities in tax-advantaged accounts from growth stocks in taxable accounts.
  • Limited flexibility: The standard allocation of balanced funds, such as 60% equities and 40% bonds, may not always align with an investor’s evolving financial objectives and risk tolerance.
  • Avoidance of certain markets: Some balanced funds take a conservative approach by avoiding international or less mainstream markets, potentially restricting their returns.

Real-world example of a balanced fund

To illustrate the concept of balanced funds in action, let’s delve into the Vanguard Balanced Index Fund Admiral Shares (VBIAX). This fund serves as a prime example, boasting a below-average risk rating by Morningstar while offering an above-average reward profile. VBIAX maintains a steadfast asset allocation of 60% stocks and 40% bonds. Over the past decade, as of April 30, 2022, the fund has consistently delivered an annual return of 8.73%. Remarkably, this comes with an impressively low expense ratio of just 0.07%. Additionally, VBIAX welcomes investors with a minimum investment requirement of $3,000, highlighting the cost-effectiveness associated with balanced funds.

Frequently asked questions

What are the key features of balanced funds?

Balanced funds stand out for their diverse portfolio that includes both stocks and bonds, offering a balanced mix of safety, income, and potential capital appreciation.

Can I adjust the asset allocation in a balanced fund?

No, balanced funds maintain fixed asset allocations, limiting an investor’s ability to customize the allocation according to their individual preferences.

Do balanced funds have tax implications?

Balanced funds may present tax challenges for investors since they do not permit the separation of income-producing securities in tax-advantaged accounts from growth stocks in taxable accounts. Investors should consider the potential tax implications when investing in these funds.

Key takeaways

  • Balanced funds offer a well-rounded investment approach, blending low- to medium-risk stocks and bonds to cater to investors seeking both capital appreciation and income.
  • They are characterized by a diversified portfolio, cost-effectiveness, reduced volatility, and suitability for risk-averse investors.
  • Investors should be aware of the fixed asset allocations in balanced funds and their potential tax implications when considering these investment vehicles.
View article sources
  1. Why balanced funds are better – Brookings Institution
  2. Understanding fund balances – Connect Carolina User Information
  3. Exploring the benefits and risks of stable value funds in investment – SuperMoney
  4. Five key principles of smart investing – SuperMoney