Q8B. Balanced funds and asset allocat... [FREE SOLUTION] (2024)

FAQs

What are the disadvantages of balanced funds? ›

The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.

For example unlike balance fund, the asset allocation fund may dramatically vary the proportion allocated to each market based on the prediction of its portfolio manager. Also while the balanced funds are designed to be low risk the asset allocation funds are not designed to be low risk.

While 7% is a far more accurate reflection of the long-term return of investing in equities, and 5% for a balanced portfolio, it's important to note these historical returns are not necessarily consistent with forecasts.

That can be good if you need stability, but this approach also reduces your long-term returns, since stocks tend to deliver much higher returns over time. So balanced funds may be better for those who need stability rather than the highest levels of returns, making them more suited to older investors.

Boring balanced funds tend to be cheaper than highly specialized ones, so they're a good core investment. Even better, because allocation funds reduce volatility through diversification, investors tend to hold on to them.

If you're 70, you'd look at sticking to 40% stocks. Of course, there's wiggle room with this formula, and it's really just a way to get started. And for many older investors, a 50-50 split of stocks and bonds is what's preferred throughout retirement, and that's fine, too.

Age 70 – 75: 40% to 50% of your portfolio, with fewer individual stocks and more funds to mitigate some risk. Age 75+: 30% to 40% of your portfolio, with as few individual stocks as possible and generally closer to 30% for most investors.

While it's important to make sure your portfolio is properly diversified, having too many funds can make it difficult to keep track of your investments. You should therefore only keep as many funds in your portfolio as you're comfortable monitoring.

What is the best fund allocation? ›

If you are a moderate-risk investor, it's best to start with a 60-30-10 or 70-20-10 allocation. Those of you who have a 60-40 allocation can also add a touch of gold to their portfolios for better diversification. If you are conservative, then 50-40-10 or 50-30-20 is a good way to start off on your investment journey.

Reduced risk- One of the biggest advantages of balanced funds is that they reduce your investment risk by balancing your exposure towards debt and equity.

In short, the average stock market return since the S&P 500's inception in 1926 through 2018 is approximately 10-11%. When adjusted for inflation, it's closer to about 7%. [Since we're talking citations in this post: Investopedia.]

At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).

Some of the advantages of mutual funds include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing, while disadvantages include high expense ratios and sales charges, management abuses, tax inefficiency, and poor trade execution.

However, they also have some risks such as market risk, model risk, and fund manager risk. Therefore, you should invest in balanced advantage funds only if you understand their working and are comfortable with their risk-return trade-off.

Stable and Consistent Returns- While equity returns are higher compared to other funds, the biggest drawback of these funds is that the returns are highly volatile.

Balanced mutual funds are geared toward investors who are looking for a mixture of safety, income, and modest capital appreciation. Typically, retirees or investors with low-risk tolerance utilize balanced funds for healthy growth and supplemental income.