InvesTrust Wealth Management

Balanced Funds: Seeking Growth and Stability

Since 2001, investment in balanced mutual funds, which hold a mix of stocks and bonds, has grown every year except in 2008, the heart of the recession, and in 2015 when a stagnant market led some investors to look for more aggressive growth opportunities. During the same period, investment in equity and bond funds has tended to rise and fall with stock and bond prices.1

Appeal of simplicity

The appeal of these hybrid funds may reflect the simplicity of putting an asset allocation strategy to work in a single investment. Asset allocation does not guarantee a profit or protect against investment loss; it is a widely used method to help manage investment risk.

Stocks and bonds working together

Because stocks and bonds tend to perform differently in different market conditions, many investors include both in their portfolios, either as individual securities or within mutual funds. Though stocks provide greater growth potential, bonds tend to be more stable, with modest potential for growth. Together, they may result in a less volatile portfolio that might not grow as fast as a stock-only portfolio during a rising market, but may not lose as much during a market downturn.

Balanced funds attempt to follow a similar strategy in a single investment. The fund manager typically strives for a specific mix, such as 60% stocks and 40% bonds, but the balance might vary within limits spelled out in the prospectus. Theoretically, the stocks in the fund provide the potential for gains, while the bonds may help reduce the effects of market volatility. Some balanced funds also include cash alternatives.

Three objectives

Balanced funds generally have three objectives: conserve principal, provide income, and pursue long-term growth. Of course, there is no guarantee that a fund will meet its objectives.

When investing in a balanced fund, you should consider the fund’s asset mix, objectives, and rebalancing guidelines as the asset mix changes due to market performance. Rebalancing is typically necessary to keep a balanced fund on track but could create a taxable event for investors.

Core holding

Although balanced funds may include a variety of stocks and bonds, they are generally not intended to be the only investment in a portfolio because they may not be sufficiently diversified. Like asset allocation, diversification — the mix of investments within a given asset class — is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.

Instead, a balanced fund that contains an appropriate asset mix for your age and risk tolerance could be a core holding that enables you to pursue diversification and other goals through a wider range of investments. For example, you may want to invest in a variety of individual securities or funds that focus on different types of stock or bonds than those in the balanced fund.

The return and principal value of all investments fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Bond funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund’s performance.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus — which contains this and other information about the investment company — can be obtained from your financial professional. You should read the prospectus carefully before investing.

1 2016 Investment Company Factbook, Investment Company Institute

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016