The five categories of equity mutual funds described above invest solely in stocks of publicly traded companies. Some investors prefer mutual funds that add debt instruments, like bonds, into the fund mix.
Balanced funds are mutual funds that invest in both equities and bonds, usually according to a fixed ratio. Balanced funds, sometimes called “asset allocation” or “hybrid” mutual funds, can use any kind of allocation ratio, though the most common is 60% equities and 40% bonds. In general, balanced funds are considered increasingly conservative – which is code for less risky – as their percentage of equity holdings decrease and bond holdings increase.
“Target-date” funds are a type of balanced fund that automatically reallocates by increasing its bond component while reducing its equity component as its target date gets closer. This type of mutual fund is often used for long-term goals that have natural target dates, like college or retirement savings.
Balanced funds tend to be lower risk than pure-play equity funds, but they also tend to have higher fund expenses. When choosing balanced funds, experts recommend comparing expense ratios because even small differences in fees can cause significant differences in returns over time.