INVESTORS WHO AREN'T far from retirement are a cautious group, and with good reason. They know they need to carefully balance their weightings of stocks and bonds to keep their nest egg growing but without too much risk. That's where balanced funds come in. Balanced funds hold both stocks and bonds, providing cautious investors with a dual-purpose vehicle.

Let's say an investor in his mid-50s would like to supplement his sizeable 401(k) account with additional investments. He doesn't own a balanced fund through his company plan, so he figures that one might be a good fit for him. Also, he recently examined the asset allocation of his 401(k) plan and discovered that it's heavier in stocks than he would like at this time. So, he wants to find a balanced fund that doesn't load up on equities.

The best way for this investor to find a suitable balanced fund is to seek out portfolios with five- and 10-year annualized returns in the upper 50% of their category. Funds with at least 10 years experience have stood the test of time, and a five-year return requirement will point to those that have also outperformed over the shorter-term.

Something for our investor to keep in mind about balanced funds is their way of finding the middle of the market. After all, they'll rarely beat the average equity fund over time, due to their fixed-income stake. On the other hand, they'll usually beat the average bond fund over the long run, thanks to their stock allocation. So, expect solid but modest returns with a balanced fund.

Expenses are important, no matter what type of fund you're buying. Demand that no-load funds have expense ratios in the bottom 50% of the balanced-fund classification. Since balanced funds are plentiful, it shouldn t be hard to find an affordable, solid-performing fund.

If you want to add a balanced fund into your mix, but you don t have a lot of extra cash to invest, consider establishing an automatic investment plan (AIP) to make regular payments from a checking account. Much like a 401(k), an AIP makes investing easy. Often the minimum that a fund requires someone to invest to open an account is waived or significantly reduced when an AIP is established.

Keep in mind that while balanced funds aim for a 60-40 mix of stocks to bonds, some bulk up in one direction or the other. So if you re looking for a more conservative option, look for a fund that doesn t lean too heavily toward equities. Read the fund prospectuses carefully and call the fund firms for asset-allocation history.

Examine both the stock and bond realms of the balanced funds you like most. Does a fund's equity portion have a value or growth bent? While most balanced funds maintain fairly conservative stock allocations, don t assume this is the case. Also, does the fixed-income portion of a fund stick to Treasurys or does it include corporates and other types of bonds? A balanced fund that holds various types of bonds will be higher on the risk scale than a Treasurys-only fund.

The answers to these questions should be available at most fund-firm Web sites. A visit to SmartMoney.com's fund snapshots will also provide the latest return data on the funds, along with top-10 holdings and sector weightings. By using all the tools available, you should be able to find a balanced fund that helps to keep your retirement portfolio on a steady course.