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 (JHLAX)
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 (RBAGX)
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 1 (JADOX)
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 your portfolio.
Read the analyst report on JHLAX
Read the analyst report on RBAGX
Read the analyst report on JADOX
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