As their name implies, Canadian balanced funds invest in a balanced portfolio of short-, medium-, and long-term bonds of federal and provincial governments and corporations and in stocks of Canadian corporations. The goal of this type of fund is to provide both growth and income in one investment. If you are a first-time investor in mutual funds or have only a small amount to invest, a balanced fund is a good starting place. Not only will it give you a well-diversified portfolio in one fund, but it will also provide you with an introduction to the various markets.
A typical balanced fund's asset mix might be 20% in money-market instruments, 40% in bonds, and 40% in stocks. These amounts will fluctuate depending on market conditions and the investment decisions of the fund manager. A fund's policy might also dictate the minimum and maximum amounts that can be invested in any one market. For example, a fund manager could have the option of placing 0%-20% in cash, 20%-60% in bonds, and 10%-60% in stocks. These ranges depend on the policies of each fund.
Balanced income funds place their investment emphasis on bonds for higher income potential, while balanced growth funds place greater emphasis on stocks for higher capital gains. If income is your primary investment goal, while still wanting exposure to the stock market, you should pick a balanced income fund rather than a balanced growth fund.
Asset allocation funds tend to get lumped together with balanced funds. However, the main difference -- and it's a big one -- between this type of fund and a balanced fund is that an asset allocation fund can invest up to 100% in stocks, in bonds, or in cash equivalents. If the fund manager believes the stock market is the place to be, then that's where most of the assets of the fund will be. The percentage, whether it be 80% or 93%, is entirely up to the fund manager; there is no fund policy on maximums and minimums to which the manager must adhere. The fund manager is free to hold whichever assets in whatever amounts he or she deems necessary in order to take full advantage of current and future market trends. (Some asset allocation funds, however, may have restrictions on amounts placed in the different markets. Make sure you know which one you are buying.)
Balanced mutual funds are affected by interest-rate changes, stock-market performance, and economic outlook. But by investing in a combination of stocks, bonds, and money-market instruments, true balanced funds are considerably less volatile than funds that invest solely in the stock market. The average volatility rating for Canadian balanced funds is 2.6, compared to 3.5 for equity funds.
The average return for Canadian balanced funds over the five-year period to December 31, 1995, was 10.5%, and returns ranged from a high of 17.5% to a low of 7.1% -- a difference of 10.4%. Interest and dividends are usually paid quarterly and capital gains annually. All Canadian balanced funds are RRSP eligible.
Finally, if it's a balanced fund you want, make sure that's what you get. Look under "Investment Objectives" in the fund prospectus. If that does not give enough detail, look at the fund's annual report for the current asset mix. This will give you, in percentages, the amounts placed in each market. If you are still not sure, call the fund company and ask if the fund has any restrictions on the amounts being invested: could the fund end up holding mostly bonds or stocks?
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