Balanced Funds aim to provide a balance between appreciation in
the principal amount and a regular income stream to the cautious
investor. This is achieved by combining different asset classed
into a single portfolio. Assets are usually allocated between
equity and debt. However, in some cases balanced funds may also
invest in money market instruments.
Asset Allocation Strategies
The idea behind a balanced fund is to provide a combination of
income and a reasonable amount of capital growth at a lower level
of risk. This is achieved through asset allocation strategies which
take into account these goals.
Firstly, such funds do not usually change the proportion in which
they invest in each asset class. In this aspect they are quite
different from target-date, life-cycle and actively managed funds.
Secondly, they generally stick to having moderate or conservative
asset allocation approaches. In the case of a conservative
approach, such funds have a higher debt component, cutting down on
risk, while providing reasonable returns. A moderate asset
allocation strategy implies holding a higher amount of equity in
the quest for higher returns.
Cost versus convenience
The recurrent criticism aimed against balanced funds is that they
increase the cost of investing. It may often be cheaper to hold a
large blend fund and a short term bond fund instead of a balanced
fund. However, this may not always be true.
This may become an even greater consideration if a balanced fund
uses a fund-of-funds approach. In this case it invests indirectly
in different asset classes through a number of funds. Costs become
higher in this case because the management fee of the fund is the
sum of those paid for each individual fund.
This is why we are presenting to you three funds which despite
being balanced funds and using a fund-of-funds approach, have
significantly low expense ratios. Each of them also has a Zacks
Rank #2 (Buy).
Mutual Fund Picks
John Hancock Lifestyle Balanced 5
Launched in June 2006, this fund has an expense ratio of 0.06% and
net assets of $14.42 billion. This fund invests around 40% of its
assets in underlying funds which invest in debt and nearly 60% in
funds which invest in equity securities. However, the proportion of
assets invested in these asset classes may vary from one where 70%
of its assets are invested in equity and 30% in debt to one where
both asset classes account for equal proportions.
In all, the fund has 62 holdings. Its top 10 holdings make up
38.06% of its assets. Its top 3 holdings are John Hancock Floating
Rate Income NAV, John Hancock 2 Active Bond NAV and John Hancock 2
Total Return NAV. The fund returned 16.66% over the last one year
period and has a Zacks Rank #2 (Buy).
American Funds Balanced Portfolio Class R-6
This fund has an expense ratio of 0.07% and net assets of $ 1.29
billion. Launched in May 2012, the fund invests in a wide variety
of underlying American Funds. These include different fund classes
like balanced, bond, growth, equity income and other funds.
Utilising this approach, the fund seeks to allocate a minimum of
45% of its assets to common stocks and other equity securities and
25% to debt instruments.
The number of holdings of the fund amount to 5. Its top three
assets are American Funds Bond Fund of America R6, American Funds
American Balanced R6 and American Funds New Perspective R6. The
fund returned 18.00% over the last one year period and has a Zacks
Rank #2 (Buy).
John Hancock 2 Core Diversified Growth & Income
Another offering from the John Hancock stable, this fund was
launched in February 1997. It is a much smaller fund with net
assets of around $40 million. Compared to the other funds under
consideration, this fund has a higher, though still impressive
expense ratio of 0.24%. 65% to 75% of its assets are invested in
equity focused funds. The amount invested in debt funds varies from
25% to 35%.
The fund has a total number of 10 assets. The asset it is most
invested in is John Hancock Strategic Equity Allocation NAV. The
next two, American Funds US Government Securities R5 and American
Funds Investment Company of America R5, together make up 33.55% of
its assets. The fund returned 18.27% over the last one year period
and has a Zacks Rank #2 (Buy).
Balanced funds are an excellent choice for the investor looking for
diversification without having to hold a wide variety of funds.
This is why all three of these funds would make good additions to
View All Zacks #1 Ranked Mutual Funds
Get Your Free (JADOX): Fund Analysis Report
Get Your Free (JHLAX): Fund Analysis Report
Get Your Free (RBAGX): Fund Analysis Report
To read this article on Zacks.com click here.