Equity V/s Bonds V/s Balanced Fund: The Basics Explained

The goal(s) of investors vary from each other and also the amount of risk they are ready to take. But obviously the returns are directly proportional to the risk taken. Today, I’m going to explain 3 basic mutual funds and their purpose every investor should know.

Equity funds (Stock Funds).

Equity funds are those mutual funds that invest principally in stocks, hence the alternate name stock funds. Since these common stocks represent an ownership share, equity in corporation, evidently the return is from the combined dividends of the stocks in a fund.

Tip! Those who are young working professionals without family commitment are normally advised to invest upto 100% on equity funds for faster capital appreciation.

These stocks stand for diversification predominantly but there are cases in which these stocks can be aggregated into classes. Such cases are the subclasses of equity funds. Such funds typically target companies based on certain characteristics.

For example, there can be a Japan fund, which invests in Japanese companies, or a Green fund which invests in environmentally friendly industries. Similarly, there are funds to invest in certain indices (e.g. the FTSE 100).

Moreover, equity funds can be subclassified along two dimensions, one along market capitalization and other along the investment style.

The market capitalization means the size of the companies whose stocks are buying through these funds. Based on this market capitalizations are classified into four categories, namely:

  1. Micro cap
  2. Small cap
  3. Mid cap
  4. Large cap

The limits of these classes varies with the market geography and other conditions but generally large cap stocks have market capitalizations of at least $10 billion, small cap stocks have below $2 billion and micro-cap stocks have market capitalizations below $300 million.

Bond Funds

In contrast to equity or stock funds, bond funds are mutual funds that invest in bonds and or similar debt securities. Hence its alternate name debt securities.

The returns are usually from the dividends in the form interest payment on the fund’s underlying debt and as periodically realized capital appreciation.

The obvious difference of bond funds to bonds is diversification and more frequent dividends. All of them are usually rated by analysts based on their credit quality. In a bond fund there can be funds that have high credit quality and low credit quality.

The quality of a fund is the average of these bonds owned by the fund.

This is major criteria of sub-classification of bond funds. It is typical for funds that pay higher yields to own lower quality bond.

Another classification is based on the maturity of the fund such as short, intermediate or long-term. Bond funds are also classified based on geography of investment market.

Even though bond funds have attractive merits such as aforementioned frequent dividend pay and high liquidity they possess some demerits that can be repugnant to some investors. The major one is the bond fees for the fund as a percentage of the total investment (not bond value).

Tip! Bond funds are suitable for retired professional who rely on pension, because it gives higher return on investment

Balanced Funds

Balanced fund

A balanced fund (as the name suggests) is devised for investors who are looking for a combination of safety, income and modest capital appreciation.

This can be ambiguous to asset allocation, in fact balanced funds belongs to the asset allocation family.

But in contrast to actively managed asset allocation funds the combination of components in the balanced funds is not altered corresponding to the market fluctuations and or upon the investors demand.

In the single portfolio of a balanced fund there would be a stock component, a bond component and some of the times, a money market component.

Basic approach to the mixtures has a moderate orientation which demands higher equity component or a conservation orientation which usually lacks riskier investments and includes a higher fixed income component.

Balanced mutual funds are rigid and somewhat immune to market conditions. They maintain a predetermined allocation between stocks and bonds such as 60% stocks and 40% bonds, with an allocation somewhere in the proximity of 60/40 is the most common approach. This fixed blend disregard of market movements isn’t necessarily bad.

Tip! A person with permanent job or reliable source of income with moderate family commitment is normally advised to chose a balanced fund for safety and capital appreciation.


This is the first part of our article series – “Know about Mutual Funds Basics”. Read the next article Targeted V/s Money Market V/s Index V/s Global Fund

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