What type of mutual fund combines a mix of stocks and bonds?

A balanced mutual fund is designed to provide a combination of both stocks and bonds within its portfolio. This structure aims to achieve diversification by investing in multiple asset types, thus balancing the potential for growth (from equities) with the stability and income generation typically associated with fixed-income securities (like bonds).

The inclusion of both asset classes allows investors to manage risk more effectively, as the performance of stocks and bonds may not move in tandem; when one asset class is underperforming, the other may provide a cushion against volatility.

In contrast, an equity mutual fund primarily invests in stocks and focuses on capital appreciation, while an index fund typically aims to replicate the performance of a specific market index, which can be either equity-focused or some index of bonds. A sector fund, on the other hand, concentrates its investments in a particular industry or sector of the economy, thus lacking the diversification effect that a balanced fund offers. This makes the balanced mutual fund the most appropriate choice for combining both stocks and bonds.