Unnerved by the tech fund frenzy of the late 1990s and the subsequent three years of bearish equity returns, many investors see balanced mutual funds as a way to tiptoe back into a rising stock market.

But while holding a mix of stocks and bonds can give balanced funds stability when it comes to returns, there are risks aplenty for this category of supposedly all-weather funds. One concern is that depending on the investment strategies spelled out in their fund prospectuses, balanced portfolios can hold securities with above-average risk on their stock and bond sides.

By design, balanced funds are meant to give investors a smoother ride than other funds due to the tendency of bonds and stocks to rise and fall at different times. Fund companies often market balanced portfolios as a less risky way to get exposure to the stock market than by selecting a stock-only fund.

Investors have responded this year as torrents of cash are flowing into balanced funds. During the second quarter, balanced funds pulled in $11.5 billion in new money, more than any other category, according to Financial Research Corp. The funds as a group are on pace this year to pull in more new money than they have since 1993.

But balanced funds are apt to lose money when stocks fall, as shown by their average 9.7% loss last year, which, while far better than the 21% decline of the average diversified stock fund, was below the 6.4% return of the average taxable bond fund. …