By Andrew Leckey

For conservative investors seeking a little balance in their lives during volatile times, a balanced mutual fund makes sense.

With a typical mix of around 60 percent stocks and 40 percent fixed income, balanced funds split the difference between growth from stocks and income from bonds. Each portion has different managers, providing an investment that functions like two separate funds in one.

For some investors, this risk-reducing hybrid provides one less thing to worry about. For others, however, it represents just half a loaf because it will never supply the euphoric results of a rousing stock market rally.

Fidelity Balanced Fund (FBALX)

Take the Fidelity Balanced Fund (FBALX), for example.

The Fidelity Balanced Fund (FBALX) is a mutual fund that seeks income and capital growth by investing in a mix of stocks and bonds. The fund has a 60% neutral allocation to stocks and other equity securities, with the remaining 40% allocated to bonds and other debt securities, including lower-quality debt securities. The fund has a total expense ratio of 0.5% and a turnover rate of 36%.

The Fidelity Balanced Fund has a solid track record, with returns of 11.60% over the past year, 6.70% over the past three years, 8.64% over the past five years, and 9.53% over the past decade.

"I would say a balanced fund is best as a core investment for investors who want exposure to equities but have some lingering concerns about them," said Brian Hogan, president of the equity division of Fidelity Investments in Boston. "The disadvantage is that in a dramatic stock market rally the balanced fund would lag behind a 100 percent equity fund."

In the case of Fidelity Balanced Fund, lead manager Bob Stansky, the former manager of Fidelity Magellan, makes sure that equity weightings are aligned with the Standard & Poor's 500, then delegates stock selection to sector specialists. Experienced manager George Fischer heads the team that runs the fixed-rate portion.

"Not only is there a different team running equities than fixed income, but within equities we have a different person running the financial services portion than the technology portion," said Hogan in explaining the fund's risk-spreading. That "no-load" (no sales charge) fund requires a $2,500 minimum initial investment charge and has a low annual expense ratio of 0.68 percent.

Critics say investors should simply buy a stock fund and a bond fund based on their own needs, even though that might require some longer-term asset adjustments by the investor.

"A disadvantage of a balanced fund is that there's nothing customized about it so will fit each individual's needs," said Harold Evensky, certified financial planner with Evensky and Katz in Coral Gables, Fla. "One investor might in reality need 70 percent equities to meet goals and a balanced fund might be 60 percent equities, while another investor who doesn't want growth and might do best with 80 percent in bonds."

Evensky does acknowledge that "reasonably-priced and reasonably-allocated" balanced funds have the advantage of simplicity since they keep rebalancing themselves as time goes on.

Vanguard Wellington (VWELX)

The Vanguard Wellington Fund (VWELX) is a balanced mutual fund that aims to provide long-term capital appreciation and reasonable current income. The fund has a 60% to 70% allocation to stocks and a 30% to 40% allocation to bonds.

The Vanguard Wellington (VWELX) is a good "no brainer" investment, he said.

The Vanguard Wellington Fund is known for its broad diversification, with assets coming from all economic sectors. The fund has a solid performance track record, with a 52-week average return of 8.13% and a 5-year total return of 34.40%. However, it is not currently ranked by U.S. News among the top Moderate Allocation Funds. The Morningstar Analyst Rating for the fund is Silver, indicating a high level of confidence in its ability to outperform its peers over time

If you fancy yourself a self-directed investor, you might get itchy not knowing exactly how all the pieces of the balanced-fund machinery are performing. It's hard to go with automatic transmission when you're used to driving stick shift.

"A problem is that you can't separate out the performance of the stocks and bonds but instead will receive the overall performance of the fund in total," said Greg Carlson, fund analyst with Morningstar Inc. "So if we have a huge rally with the Standard and Poor's 500 up 50 percent, your balanced fund won't be up 50 percent because the equity performance is suppressed by the fixed-income component."

The low expense ratios of balanced funds is due to the fact that there are few active asset allocation decisions. This is also money that stays put because conservative investors don't want to try anything fancy.

Dodge and Cox Balanced Fund (DODBX)

The Dodge and Cox Balanced Fund (DODBX) is another notable balanced fund, according to Carlson.

The Dodge and Cox Balanced Fund (DODBX) is a diversified mutual fund that invests in a mix of stocks and bonds. The fund seeks to provide regular income, conservation of principal, and an opportunity for long-term growth of principal and income.

DODBX is a good choice for investors who are looking for a moderate-risk investment with the potential for both income and growth. The fund has a long track record of success, and it is managed by a team of experienced investment professionals.

Run by a 15-member investment committee, it is more bullish on stocks than are many other balanced funds and willing to take chances on out-of-favor stocks. It currently has 71 percent of its portfolio in stocks, 27 percent in bonds and the rest cash.

Conclusion

Dull and boring?

For conservative investors, balanced mutual funds are a sensible balancing act that lets them sleep better in turbulent times.

Investors should carefully consider their risk tolerance, investment goals, and time horizon before investing in balanced mutual funds. It's also important to review the specific fund's prospectus to understand its investment strategy, fees, and historical performance before making an investment decision. Additionally, like all mutual funds, balanced funds may charge management fees and other expenses that can affect overall returns, so it's essential to be aware of these costs.

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© Andrew Leckey

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