Balanced mutual funds are one of the types of various mutual funds available in the market. A mutual fund that buys a combination of common stock, preferred stock, bonds, and short-term bonds, to provide both income and capital appreciation while avoiding excessive risk. The purpose of balanced funds is to provide investors with a single mutual fund that combines both growth and income objectives, by investing in both stocks (for growth) and bonds (for income). Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss; the flip side, of course, is that balanced funds will usually increase less than an all-stock fund during a bull market. It is also sometimes called hybrid funds. The proportion in which the balanced mutual funds allocate their assets is usually 60 % to 65 % in stocks and the balance in bonds. The proportion is not disturbed while managing the fund as it is to remain within the pre set minimum and maximum limits.
One can draw some similarity of balanced funds with well diversified funds. Asset allocated for stocks are diversified into different sectors which are performing with high returns. Fund allocation weightage is determined by the stocks' return potentials. The top stock, for example may get an allocation of say 10% and the lesser the potential the lesser is the percentage allocation of funds. The same pattern is then repeated for another sector of stocks. Sectors are chosen subject to various parameters. The allocation to bonds is distributed among bonds issued by governments and banks. This investment provides guaranteed returns at a steady rate over a period. This gives the stability to the entire fund cushioning the violent fluctuations of aggressive stock investment.
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