What is a balanced fund?


9:30 am

23 May 2019

As we have seen, investment funds are financial instruments that enable you to invest in a diversified portfolio of equities or bonds, or a mixture of both. A balanced fund is a particular type of investment fund, and in this article, we will cover their characteristics, how they work, their risks, and how they differ from absolute return funds.

What are balanced funds, and how do they work?

To simplify, a balanced fund is an instrument that invests in both equities and bonds, in different proportions according to the investment strategy. The aim of a balanced fund is to be the right investment whatever the financial climate.

Balanced funds generally invest between 10% and 90% of their portfolios in equities. The percentage varies from fund to fund, and is specified in the fund documents.

As the name suggests, these investment funds balance the greater stability of bond yields with the more volatile performance of the equity markets. The aim is to increase the value of the portfolio and to generate gains over periods that are not overly long. Lastly, the equity component is usually invested in the international markets, in a broad range of countries and sectors.

So, if you are looking for a medium-term investment in a balanced fund, a product such as Tendercapital Balanced could be the ideal fund. (To find out more about Tendercapital Balanced, click here).

What are the risks of a balanced fund?

Balanced funds usually have an intermediate risk profile, compared with money market and bond funds (lower risk) and equity funds (higher risk). The risk mainly relates to the percentage of the portfolio invested in equities: the larger the equity component, the higher the risk. This is because equities are subject to market fluctuations that – especially with a short-/ medium-term investment – may have a major influence on fund performance.

What is the difference between balanced and absolute return funds?

On the surface, it is easy to confuse balanced funds with absolute return funds. They both invest in the equity and bond markets, but there is an important difference.

The managers of absolute return funds have no constraints on where they invest. In other words, they are free to change their asset allocation to adjust to market phases. This means that they can change the percentage of their investments in the equity markets from 0% to 100% any time, entirely at their own discretion.

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