Seeking Balance in a Mutual Fund

Maintaining an appropriate balance of stocks and bonds is one of the most fundamental concepts in constructing an investment portfolio. Stocks provide greater growth potential with higher risk and relatively low income; bonds tend to be more stable, with modest potential for growth and income. 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.

Three Objectives

Balanced mutual funds attempt to follow a similar strategy. 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. 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. The fund manager may rebalance to keep a balanced fund on track, but this could create a taxable event for investors.

Core Holding

Although balanced funds typically 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. Diversification refers to the mix of investments within a given asset class.

Instead, a balanced fund 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 other asset classes, hold a wider variety of individual securities, and/or add funds that focus on different types of stocks and bonds than those in the balanced fund. Keep in mind that as you change the asset allocation and diversification of your portfolio, you may also be changing the level of risk.

Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss. 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, including balanced 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.

 
Micham and McSwain CPA
314 West Millbrook Road, Suite 001 Raleigh, NC 27609
Phone: (919) 846-2640 Fax: (919) 935-0616
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