Even as the Fed raised interest rates by 75 bps in their November meet while hinting that it may bring down the rate of hikes in the near term, market participants have remained apprehensive that the economy may still be moving toward a slowdown. Supporting the sentiment was Fed Chair Jerome Powell’s statement after the meeting where he said even if policymakers scale back future hikes, the Fed was still undecided about the level that the rate of interest needed to be at to curb inflation.
Apparently, there is no clear and certain outlook that can be banked on currently. In the very least, it is not coming from the Fed.
It has thus become imperative to add a safety net to one’s portfolio, and maintaining a balance between debt and equity segments has become the order of the day. In such an environment, balanced funds are convenient options as investing in them involves buying into a single fund offering diversification. These funds reduce the volatility of a portfolio while providing higher returns than pure fixed-income investments.
Balanced mutual funds are of two broad types, equity-oriented balanced funds, and debt-oriented balanced funds. When the market is moving up, the fund managers focus on the equities side to make the most of the market’s gains. On the other hand, they fortify the fund with bond investments during a downturn as bonds generate a steady income stream and offer less volatility.
Capital gains arising out of balanced funds, if those funds are held for longer periods, are tax-free. Also, balanced funds rarely change their portfolio mix of stocks and bonds, thus having lower total expense ratios and reduced costs.
In summary, balanced funds provide a much-required stability when the market is volatile and maximize income in good times because of the inherent nature of their diversification.
Hence, with the threat of a recession still around in the U.S. economy, astute investors should invest in balanced mutual funds at present. Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
We have thus selected four such balanced mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy), 2 (Buy), have positive three-year and five-year annualized returns, minimum initial investments within $5000 and carry a low expense ratio.
American Century Strategic Allocation: Aggressive Fund AAAUX usually invests 79% of its net assets in stocks, 20% in bonds and 1% in cash equivalents. AAAUX also invests in debt securities payable in U.S. and foreign currencies, that meet certain fundamental and technical standards.
Currently, 18% of AAAUX is invested in large-cap growth stocks, 29.8% in large-cap value stocks, and 9.3% in intermediate bonds.Scott A. Wilson has been the lead manager of AAAUX since Mar 31, 2011.
AAAUX’s 3-year and 5-year annualized returns are 4.4% and 5.1%, respectively. Its net expense ratio is 0.27% compared to the category average of 0.71%. AAAUX has a Zacks Mutual Fund Rank #2. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
Bruce Fund BRUFX invests primarily in common stocks and bonds. BRUFX also invests in future interest and principal of U.S. government securities, commonly known as “zero coupon” bonds.
Currently, 41.8% of its portfolio is invested in large-cap value stocks, 24.9% in foreign bonds and 11.1% in intermediate bonds. R. Jeffrey Bruce has been the lead manager of BRUFX since Dec 30, 1983.
BRUFX’s 3-year and 5-year annualized returns are 4.9% and 6.1%, respectively. Its net expense ratio is 0.66% compared to the category average of 0.84%. BRUFX has a Zacks Mutual Fund Rank #1.
Columbia Balanced Fund CBALX seeks to invest in equity and debt securities based on their relative risk and return. CBALX usually invests between 35% and 65% in each asset class, but not less than 25% or more than 75% in any of them.
Currently, 34.7% of the portfolio is invested in large-cap growth stocks, 30.5% in large-cap value stocks, and 33.3% in intermediate bonds. Ronald J. Stahl has been the lead manager of CBALX since Mar 17, 2005.
CBALX’s 3-year and 5-year annualized returns are 4.6% and 5.4%, respectively. Its net expense ratio is 0.67% compared to the category average of 0.84%. CBALX has a Zacks Mutual Fund Rank #2.
Fidelity Advisor Balanced Fund FAIOX invests about 60% of its net assets in stocks and other equity securities and the remainder in bonds and other debt securities, including lower-quality debt securities known as junk bonds. FAIOX invests at least 25% of total assets in fixed-income senior securities.
Currently, 38.1% of FAIOX is invested in large-cap growth stocks, 31.8% in large-cap value stocks, and 24.5% in intermediate bonds. Douglas E. Simmons has been the lead manager of FAIOX since Sep 15, 2008.
FAIOX’s 3-year and 5-year annualized returns are 6.5% and 6.8%, respectively. Its net expense ratio is 0.56% compared to the category average of 0.84%. FAIOX has a Zacks Mutual Fund Rank #1.
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