Balanced Mutual Funds

Investors have many options when it comes to investing in mutual funds to build a portfolio and can choose from a seemingly almost infinite number of funds. Once an investor determines their investment risk level, typically a model portfolio of securities are recommended including stocks, bonds, real estate, cash, etc. Typically, the model gives a percentage of each category.

With this knowledge an investor has 2 options:

1. Invest in a mutual fund that has this same blend of securities that meets this risk level.
2. Invest in a series of mutual funds and having at least one mutual fund in each category.

The advantage of a single mutual fund is that diversification can be achieved for a relatively small amount of money, such as $2,500. The disadvantage of this approach is you are at the mercy of the performance of the mutual fund manager at selecting the portfolio. If the fund manager selects poorly you have a poor result.

The advantage of a series of mutual funds is that you can select mutual funds for each category and greatly improve diversification. The outcome is no longer up to the performance of a single mutual fund manager. Diversification exists with having multiple fund managers.

Which option is best? If the amount to be invested is less than $5,000 a single mutual fund probably makes the most sense. If the amount is above $10,000 having multiple mutual funds probably makes the most sense.

Keys to selecting multiple mutual funds include:

• Understanding the securities in each fund
• Interactions with the other funds
• Having highly rated mutual funds

Bottom Line: Having diversification is good for an investor and a balanced mutual fund has its place. Better options probably exist when a larger sum of money is available.