Balanced Mutual Funds Provide Modest But Solid Returns
Investment goals can sometimes be seemingly opposed to one another, depending on the various circumstances of an investor’s life. An older investor who is closer to retirement generally feels very protective about his nest egg and does not want to take on so much risk that it is lost. On the other hand, retirement is still some years away, and there is the potential to have the nest egg grow a little while longer. So, where does he place his money?
The mutual fund world has an option to offer him: balanced mutual funds. These funds are designed to meet the two goals of capital preservation and capital appreciation at the same time. The mutual fund attempts to do this by investing in both equity and debt securities. The bond allocation is meant to provide stability and income, while the stock allocation is meant to provide capital gains and also income, depending on whether the stocks chosen pay high dividends.
Obviously, such a fund is not designed to provide high returns, but the modest returns it does provide are solid and not likely to fluctuate save for major changes in market conditions. Conservative or older investors who are satisfied with stable, modest returns are fond of balanced mutual funds because they provide capital preservation with above-average growth but safely within their risk tolerance limits.
Balanced mutual funds have been criticized for not being tax-efficient, but this issue is easily taken care of by holding balanced mutual funds in a tax-advantaged account such as an Individual Retirement Account. These funds can safely hold investor’s monies until retirement while providing modest growth to add any remaining dollars to the nest egg before retirement finally arrives.
The main advantage of balanced mutual funds is their low risk. Unlike other products, like bonds backed by investment property mortgages, balanced mutual funds are more solid.
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