Beware the Balanced Fund

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.