Brief Insight To A Balanced Fund
Balance funds invest in a mix of equities, money market, real estate and fixed income securities. They attempt to balance the aim of achieving higher returns against the risk of losing money. Most of these funds follow a formula to split funds among the different types of investments. They tend to have more risk than fixed income funds, but less risk than pure equity funds. Aggressive funds hold more equities and fewer bonds, while conservative funds hold fewer equities relative to bonds.
Choosing between equity and debt is difficult in the best of times. To get over this problem, one can invest in a balanced mutual fund. The main objective of these funds is to offer you the best of both worlds while limiting your exposure to the inherent risk accompanying these securities.
Why Invest When The Equities Market Is Currently Bearish?
If your balanced mutual fund is yielding a lower return than you anticipated because of the current bearish market, you may be tempted to cash in your fund units and invest your money elsewhere. The rate of return of other funds may look enticing, but be careful; there are both pros and cons to the redemption of your funds in a bearish market. Let's examine the circumstances in which liquidation of your fund units would have negative consequences.
In a bearish market, most stocks see their share prices fall, often substantially. One of the safest strategies, and the most extreme, is to sell all of your investments and either hold cash or invest the proceeds into much more stable financial instruments, such as short-term government bonds. By doing this, an investor can reduce his or her exposure to the stock market and minimize the effects of a bearish market. But by so doing, an investor would likely move out of the market at a loss position. The inverse position would be to be involved in investing in larger companies with strong balance sheets and a long operational history, which are considered to be defensive stocks. The reason for this is that these larger and more stable companies tend to be less affected by an overall downturn in the economy or stock market, making their share prices less vulnerable to a larger fall.
The savviest investors know that when stocks are underpriced is the best time to buy. In a bearish market as most stocks are undervalued the price of a balanced fund is also underpriced. Undervalued often is confused with cheap, but the two concepts are very different. A stock/fund is undervalued when the price does not accurately reflect the prospects, assets or revenue stream of the company/entity. Just because a stock/fund has a low share price does not make it a bargain. Price alone cannot be used to determine if a stock/fund is undervalued.
Even the best countries, companies, industries, and sectors fall out of favor from time to time. A fully-informed investor, with a firm understanding of the situation, can calmly stride into a turbulent market and buy up shares/units at a fraction of their intrinsic value. Nigeria’s current economic and politically turbulence has made it unfavorable to investors in the short term but at the long run, we believe that investors’ confidence will be restored and with that share prices of stocks would also elevate thereby increasing unit price of balanced funds. This brings to bear the need to buy now when prices are at its lowest.
Buying or selling a mutual fund isn't something you do impulsively, without a great deal of thought and consideration. Remember that you originally invested in your mutual fund because you were confident in it, so make sure you are clear on your reasons for letting it go. And that to be a savvy investor means you know when to buy and what to buy.