Balanced Funds: A Balanced Approach to Investing in Volatile Markets
In times of volatile market movements, it is a challenge for some investors to keep their emotions in check. Investing in a balanced fund may be an effective way of navigating uncertain market conditions.
When markets are rallying, there is a natural tendency for investors to ride with the upside. But when markets correct, some investors may be prone to disposing their investments as their anxieties cloud their better judgment. Yet, the wisest thing for investors to do at such times may be to remain calm and maintain a long-term focused approach to their investments. Keeping an investment portfolio that is diversified across different asset classes and various equity markets is an effective strategy to ride through periods of adverse market movements.
In the short term, as stock markets tend to be volatile by nature, extended periods of rising share prices can often be interrupted by sudden bouts of consolidation. In such times, investors who have moderate risk appetite may consider holding a balanced fund comprising both equities and bonds in near- equal proportions.
Balanced funds aim to provide income and capital growth over the medium to long-term period through a balanced asset allocation approach — 40% to 60% of the fund’s Net Asset Value (NAV) is invested in equities while the balance is invested in debt securities and liquid assets. In comparison, equity funds generally have higher exposure of 75% to 98% in equities, with the balance in fixed income securities and liquid assets.
Example of Asset Allocation of Equity Funds vs. Balanced Funds
The main benefits of investing in balanced funds are:
- More Stable Returns: The overall portfolio risk of a balanced fund is reduced as the returns of equity and bond investments are generally not positively correlated. The potentially higher but more volatile returns from equity investments are moderated by the lower and more stable returns of the fund’s investment in bonds. As a result, the returns of a balanced fund tend to be less volatile than an equity fund.
- Portfolio rebalancing: In times of rising markets, fund managers of balanced funds generally rebalance the portfolio by taking profits on equity investments and maintaining the exposure to equities at a maximum of 60% of the fund’s NAV.
- Capital growth: A balanced fund still allows investors to participate in the long-term capital growth of equity markets as a sizeable portion of up to 60% of the fund is invested in equities.
In conclusion, balanced funds are suited for medium to long-term investors with moderate risk tolerance as these funds (which invest up to 60% of their NAVs in equities) allow investors to participate in the long-term capital growth of equity markets.
This article is prepared solely for educational and awareness purposes and should not be construed as an offer or a solicitation of an offer to purchase or subscribe to products offered by Public Mutual. No representation or warranty is made by Public Mutual, nor is there acceptance of any responsibility or liability as to the accuracy, completeness or correctness of the information contained herein.