When it comes to investing, they say you should not put all your eggs in one basket. But how do you choose between the different stocks, bonds, and other assets? If you are wondering how to benefit by investing in the world of both equities and bonds, then a balanced fund is the answer.
A balanced fund is a type of mutual fund that spreads your investment across bonds and stocks. The fund maintains a constant percentage of asset allocation in its portfolio. For example, most balanced funds invest 60% of the money in stocks and 40% in bonds.
When the stock market is doing well, the value of stocks will go up causing an imbalance between the asset allocation. The fund manager will rebalance the portfolio and maintain the 60% stock and 40% bond composition. The same goes for when stocks are performing poorly; the fund manager will make an effort to invest more money in bonds.
Investors who are keen to put their money in both stocks and bonds, should consider a balanced fund. Traditionally, most people are advised to put their money into a diversified stock fund for growth, and income safety. With a balanced fund, you get the best of both worlds: some exposure to stocks and bonds so that your investment returns are protected against market volatility.
What is a Balanced Fund?
A balanced fund, also known as a blended fund or a multi-asset fund, is an investment vehicle that aims to provide both capital growth and income by investing in a mix of asset classes, including stocks, bonds, and cash. It’s mostly composed of stocks and a bond component. It’s a medium-to-long-term investment that gives the investor a long-term investment and a source of income.
Multi asset funds have a fixed asset allocation, with most of them taking up 60% stock and 40% bond composition. Blended funds provide investors with financial security, income, and modest asset appreciation. These are the components of a balanced fund.
Equity Component
The equity component will prevent the impact of inflation on the investor’s capital. This will ensure the preservation of the investors’ money. Most funds invest in large equities and dividend-paying companies.
Bond Component
The bond component provides the investor with an income stream and reduces volatility brought about by the equity component.
How Balanced Funds Work
When you invest in a balanced fund, the manager will distribute the money based on the asset allocation of the fund. When the stock or the equity portion grows and causes an imbalance, the fund manager rebalances.
For instance, during bull markets, when stock prices are rising, the equity portion will outgrow the bond portion. The fund manager will sell the portion of the equity and rebalance the bond portion, making sure the fixed component is maintained. In a bear market, when the stocks fail, the fund manager will do the opposite.
Unlike any other fund, the multi asset fund maintains a constant asset allocation. As an investor, you need to compare the asset allocation of the fund and choose one that suits you. If you have a high-risk appetite, you can choose a fund that has a higher percentage of stocks. On the other hand, you may want to lean toward a higher bond portion if you are a medium-risk investor.
The Advantages of Investing in Balanced Funds
Balanced funds have several advantages.
Diversification of your investments
Balanced funds allow you to invest your money in an already diversified portfolio. In times of stock market volatility, a balanced fund provides investors with the assurance that they will not lose their entire investment.
Good investment for a beginner
Fund managers ensure your funds appreciate and you have a source of income. They do all the work, and this makes a balanced fund ideal for those who are starting their investment journey. You don’t have to rebalance the fund on your own.
Low risk
Multi- asset funds have low risk as compared to investing in individual instruments.
A balance between wealth growth and preservation.
When the economy is doing well, stocks will do better than bonds. On the other hand, bonds will perform better when the economy is in a downturn. During economic upturns, companies grow and their share prices increase. They are also able to pay a dividend. In such times, stocks will outperform bonds.
During hard economic times, stocks will be in a downward trend. Bonds are debts, and that means the interest will be paid whether the economic times are hard or not. As such, bonds will do better during an economic downturn.
Investors don’t have to invest in multiple funds.
When you buy into a blended fund, there is no need to invest in multiple funds.
Allow investors to withdraw money without changing the asset ratio.
Investors are allowed to withdraw from the balanced funds periodically without upsetting the investment ratio.
Hedge against inflation.
Balanced funds have a bond and an equity component. The bonds will earn interest and they will be protected against inflation. Bonds earn interest based on a fixed rate and a variable rate that depends on inflation.
In addition, most stocks will give a higher return than the inflation rate. This hedges out the impact of inflation on the money you have invested.
The Disadvantages of Balanced Funds.
Blended funds have the following disadvantages:
The static allocation mix of the assets may not always be the best.
Balanced funds have a static mix of assets. This means that even if one of the assets is doing better, the fund manager will not change the ratio. In the case of a bull market, when the stock market is doing well, the fund manager will not change the ratio based on the market outlook.
This will limit the returns on your investment. A static allocation mix means the fund manager will not take advantage of the current market outlook. Instead, they have to maintain the asset allocation as per the fund guidelines.
Limited to local stocks
Exposure to international stocks can give your portfolio a better return. However, most balanced funds focus on local markets and ignore international markets that have higher market capitalisation.
Fund expenses may be high.
Since fund managers do the work of selecting the instruments to trade, the fund expenses may be a bit high as compared to other funds. The fund managers do the work for you.
Slower returns compared to an equity-only fund
In good economic times, equity-only funds will perform better than balanced funds. In the long term, a balanced fund will give you lower returns as compared to equity funds.
High risk if the fund has a higher stock allocation.
Stocks are volatile, and as such, investing in a balanced fund with a high stock allocation makes it high risk.
Returns depend on the asset allocation that the managers choose.
The returns of a balanced fund depend on the expertise of the fund managers. The asset allocation they opt for determines the returns an investor will get from the fund.
How to choose the right Balanced Fund
Before selecting a balanced fund, consider the following:
Past performance of the fund
Choose a fund that shows consistent positive performance. Although this does not guarantee a good performance in the future, start by checking how the fund has been performing. This gives you an idea of the expertise of the fund managers.
Risk return ratio
A ratio such as the Sharpe ratio and the standard deviation indicates the risk level of a fund.
Total expense ratio (TER)
A higher TER will eat into your returns. Make sure the fund you select does not have a higher TER, as that reduces the amount you will receive.
The reputation of fund managers
Work with a fund manager with a good reputation. When it comes to balanced funds, the manager’s experience is key as they select where the money goes. Choose a fund with expert managers.
Assets under management (AUM)
The higher the AUM of a fund, the better as the risk is minimized. If a fund has one large investor, their withdrawal from the fund may affect the returns of smaller investors.
Fund composition
The composition of the balanced fund will determine the returns and growth. If your balanced fund of choice has more equities than bonds, the returns are likely to be higher if the economy is up.
Regulator
Make sure the fund you invest in is regulated by the Capital Markets Authority and audited by reputable auditors.
Should I Invest in Balanced Funds?
Balanced funds provide investors with the security of their capital. That makes them ideal for new investors. If you are just starting your investment journey, look out for balanced funds in the market.
It is also suitable for those investors who are nearing retirement and don’t want to risk their money.
Managing Your Portfolio
As your portfolio grows, it’s important to know how to manage it. Use the money you get from the funds to diversify across multiple funds. Don’t overinvest in one particular portfolio.
Financial advisors recommend you have a stock percentage of 100 minus your age. This means as you grow older, you should invest in less volatile instruments. For instance, if you are 30, your stock portfolio should be 100 minus 30, which is 70%. As you grow older, you divest and invest in other more capital-secured funds.
It’s important to understand the different funds and how appropriate they are for each season of your life. For instance, bonds are generally secure and would be more appropriate if you are retired or nearing retirement as they give you a consistent income. On the other hand, funds that are dominated by equities are considered the best when growing your portfolio.
The Best-Balanced Fund in Kenya
Here is a summary of the balanced funds in Kenya.
| Fund | Minimum investment | Minimum Top up | Management fees/ Expenses | Targeted return | Distribution | Regulator |
| Cytonn Balanced fund | Ksh 1,000 | Ksh 1,000 | Management fees of 2.5%p. a | 13.1% | Quarterly | – |
| Zimele Balanced fund | Ksh 100 | Management fees 2.5% p.a Admin fees of 3% | Quarterly | CMA | ||
| CIC Balanced fund | Ksh 5,000 | Ksh 1,000 | Initial fees 2.25 Management fees of 2.0 p. a | Quarterly | CMA | |
| Old Mutual Balanced fund | Ksh 5,000 | Ksh 1,000 | A service fee of 3.37% p.a plus VAT | CMA | CMA |
A balanced fund is a type of mutual fund that invests in both stocks and bonds. The goal of a balanced fund is to provide investors with a level of risk and return that is different than what they would get if they invested in either stocks or bonds alone. While there are no guarantees with any investment, a well-managed balanced fund has the potential to offer investors a higher level of return than they would not get from investing in either stocks or bonds alone.
