A balanced fund or an asset allocation fund is a mutual fund, exchange-traded fund (ETF), closed-end fund, or unit investment trust (UIT) that invests in stocks, bonds, and money market instruments in an attempt to reduce risk but still provide capital appreciation and income.

Although balanced funds are designed to reduce risk by diversifying among different investment categories, they still have the same risks as the underlying investments. These funds typically hold a relatively fixed allocation of their underlying categories of investments, but the allocations will differ from balanced fund to balanced fund. One common example of a balanced fund is a fund that invests 60% of its portfolio in stocks and 40% of its portfolio in bonds.

Balanced funds may seem similar to target date funds. The difference is that target date funds automatically change their investment mix or asset allocation over time as the target date nears.  With balanced funds, the investment mix stays the same.

Before investing in a balanced fund, you should carefully read the fund’s available information, including its prospectus and most recent shareholder report.