A balanced investment strategy attempts to balance the return and risk of a portfolio.
The strategy is implemented by distributing the investment money in high and low-risk assets with the idea that high-risk assets will bring the highest returns, whereas low-risk assets will offer the minimum risks.
A balanced investment strategy has many benefits to offer investors. Firstly, it empowers investors to make a profit when the market is in an uptrend, without having to risk everything. Investors achieve this balance by having moderate investments in both high-risk and low-risk assets.
A balanced investment strategy can often be referred to as an aggressive strategy, however, it remains to be a safe investment option since it guarantees capital retention for investors.
A balanced investment strategy lies somewhere in the middle of high and low-risk investments - a fine mix of an aggressive and a conservative investment strategy.
The current income strategy involves the selection of investments offering returns higher than the average capital returns. It focuses on deriving income from a portfolio, which might as well be in the form of interest or dividends.
Capital preservation is another strategy that guarantees loss prevention and a capital return in the portfolio, helping investors to maintain a good capital level. These strategies are neither risky nor aggressive, unlike growth-oriented strategies, which aim to increase the value of an investment over a fixed time period, resulting in a high capital return in an aggressive manner.
A mutual fund that invests in both high-risk and low-risk asset classes in a single portfolio is known as a balanced fund. These funds strike a balance between debt and equity, hence the name balanced fund. These funds generally stick to a relatively fixed mix of investment bonds and stocks. They are mainly directed towards people having low-risk tolerance, aspiring to have a side income or a modest appreciation of their capital, such as retirees.
Since balanced funds allocate a fixed set portion to bonds and stocks, they provide diversification within a single portfolio. The only challenge is that the fees are higher than index funds at times, even outweighing the advantages of a balanced mutual fund. Therefore, a similar balanced strategy can be implemented by adding index funds or several mutual funds in a single portfolio for a relatively lower cost on the whole.
A target-date fund differs from balanced funds in such a way that it is designed for people who plan on retiring at a specific age. These funds are not based on a fixed plan or divisions. The allocations within the fund change over time, becoming more conservative as the plan progresses, gradually diverting a larger percentage of investment towards bonds instead of equities. They can be thought of as a tailor-made investment plan mainly for retirees, making the investment more and more conservative as time passes by.
A sensible approach is to have the majority of the savings in a balanced fund. Another preferred approach is investing in a target-date fund since the allocations change as the investor becomes older. However, a few main advantages of investing in a balanced mutual fund are that they provide diversification and are less volatile. While the downside is its high fees and reduction in returns over time.
Even though a balanced mutual fund generates lower capital returns as opposed to all-equity funds, it is still considered to be the safer option because the returns of a balanced mutual fund are mostly less volatile. In most cases, a greater percentage of capital is invested toward low-risk assets that generate more stable and less volatile capital returns with modest appreciation.
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