Balanced fund

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A balanced fund combines an stock (or equity) component, a bond component and, sometimes, a money market component, in a one-fund diversified portfolio.[1] For Canadian investors, balanced funds have generally been mutual funds, but exchange-traded fund versions have been gradually appearing.

Balanced funds can be a good option for new investors with small amounts to invest regularly, or investors who want a one-fund solution:[2]

If you’re just getting into the markets then it’s best to test the water by putting a small amount of money into a balanced fund. If the ride proves to be too wild then it’s an easy matter to lean more heavily on bonds and GICs. Alternately, those who don’t mind the ups and downs might tilt their portfolios a little more heavily to stocks. Either way, it’s a valuable lesson to learn before putting a large amount of money at risk.

However, simplicity comes at a price, since the average balanced fund in Canada has a management expense ratio (MER) of 2.15%.[3] High MERs will seriously affect future returns, as can be shown on the Mutual fund fee calculator | Investor Education Fund. This is why low-cost balanced funds should be sought.

Advantages of balanced funds

The main advantages of balanced funds are:[4]

  • Easy account setup
  • No need to learn how to trade in a brokerage account
  • A single monthly contribution (making pre-authorized monthly contributions is generally not possible with ETFs)
  • Automatic rebalancing
  • Client support

For investors with difficulties tolerating the ups and downs of the stock market, balanced funds may have some behavioural advantages: ".. by packaging together both stocks and bonds, they help to conceal the volatility of their underlying components".[5] This may prevent some investors from engaging in market timing, which could lead to lower returns. The behavioural argument is also put forward by Dan Hallett:[6]

Early in my career, I didn’t recommend balanced funds because of the fees. But when I became aware of the investor behavioural benefits, I started recommending balanced funds. Since investors only see the smoothed return path of the ‘balanced bundle’, investors are less prone to panic and greed - leading to longer holding periods which, in turn, leads to higher investor returns.

Balanced fund categories

The Canadian Investment Funds Standards Committee (CIFSC) classes balanced mutual funds in six categories:[7]

Fund category Canadian content (%) Equities (%)
Canadian Fixed Income Balanced ≥70 5-40
Canadian Neutral Balanced ≥70 40-60
Canadian Equity Balanced ≥70 60-90
Global Fixed Income Balanced <70 5-40
Global Neutral Balanced <70 40-60
Global Equity Balanced <70 60-90

The percentage of assets not invested in equities will go to fixed income and cash. These balanced funds categories are used, for example, by the Globefund filter.

Low-cost balanced funds

How to choose a low-cost balanced fund

  • Make sure that the prospective fund has an asset allocation that fits your needs. There are six categories of conventional balanced funds in Canada, with equity contents ranging from 5% to 90% (see previous section)
  • Avoid loads: several no-load funds are available
  • Check the minimum amount: unfortunately, several low-MER funds have a high minimum investment
  • If buying directly from the mutual fund company, make sure that the prospective fund is available in your province
  • If buying through a discount broker, make sure that it offers the prospective fund
  • The lower the MER, the better, but also look at the long-term returns (5 years, 10 years, 15 years)

Some ideas for investigation

Low-cost balanced funds that come up often in Financial Wisdom Forum discussions or in Globe and Mail articles ([2][5][8]), or that are suggested by Canadian Couch Potato for small accounts[9] include:

Actively managed:

Passively managed:

Arguments against balanced funds, and alternatives

Critics of balanced funds make the following points:

  • A balanced fund’s selection and weighing of asset classes may not match an investor’s desired asset allocation.
  • Investors having both registered and non-registered accounts can locate asset classes in the most efficent way (see Tax-efficient investing) if they don't use a single balanced fund, but instead use one fund per asset class. For example, Canadian equities would be held in a taxable (non-registered) account, whereas US Equities and Fixed income would be held in a Registered Retirement Savings Plan (RRSP).
  • The costs of balanced funds, even the "low-cost" ones listed above, are at least double those of plain-vanilla exchange-traded funds (ETFs) or inexpensive index funds.

If your portfolio is worth $100 000 and you are paying 1% in MERs for a balanced fund, that’s a fee of $1000 every year. You could cut your cost in half, or more, by assembling a simple index portfolio with three to five index funds or ETFs and rebalancing it every year. Rebalancing requires simple arithmetic and maybe 15 minutes of your time. This small effort could save you $500 or more every year.

See also

References

  1. Balanced Fund Definition | Investopedia, viewed January 5, 2015; definition slightly modified.
  2. 2.0 2.1 Norman Rothery, A wise resolution? Check out low-fee balanced funds, The Globe and Mail, January 2, 2015, viewed January 10, 2015
  3. Morningstar, Global Fund Investor Experience - 2013 Report, May 15, 2013, viewed January 14, 2015: "Among the 24 countries in this survey, Canada has the highest annual expense ratios for equity funds, the second highest for bond funds, and the highest for allocations funds"
  4. The One-Fund Solution, Canadian Couch Potato, May 2014, viewed January 25, 2015.
  5. 5.0 5.1 Norman Rothery, The case for simple, boring balanced funds, The Globe and Mail, August 2, 2013, viewed January 14, 2015
  6. Dan Hallett, The ironic comfort of balanced funds, August 30, 2010, viewed January 14, 2015
  7. Canadian Investment Funds Standards Committee, Fund Category List, viewed January 14, 2015
  8. Rob Carrick, The right balance: Low fees, high returns, Globefund, September 22, 2009.
  9. Dan Bortolotti and Justin Bender, The One Fund Solution - Getting started in index investing with the Tangerine Investment Funds, May 2014, viewed December 31, 2014

External links