Balanced Funds

Balanced funds are mutual funds comprised of both stocks and bonds. In order to be considered a balanced fund, federal securities law requires that a fund have at 25 percent of its holdings in bonds and 25 percent of its holdings in stocks. The rest of the holdings can vary, but are usually based on how the stock market is doing at that particular time. When the stock market is on an upswing, balanced funds tend to invest more heavily in stocks. When the stock market is on a slide, balanced funds tent to invest more heavily in bonds.

Generally speaking, of the various types of investment vehicles, balanced funds are more stable than growth funds because of the requirement that they hold a certain mixture of securities, which includes bonds. By throwing stocks into the mix, balanced funds produce higher returns than bond funds. Of course, because they are less risky, the potential returns on balanced funds aren't as high as growth funds. Balanced funds are a good way to invest in both stocks and bonds and have the advantages of each type of security offset the other's disadvantages.