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In order to choose the best mutual fund asset allocation, you must determine your investment time horizon and your level of risk tolerance. Mutual funds are comprised of thousands of securities including stocks, bonds, and real estate related assets. Investors buy shares in the fund and indirectly own the underlying assets. Share prices of mutual funds have no principal guarantees and can lose value over time, so investors should make sure that they understand the potential risks and rewards before buying shares.
The first step in choosing a mutual fund asset allocation model is deciding how long you intend to own the shares. Stocks are subject to more price volatility than bonds, especially in the short-term, which means stock heavy funds are not suitable for people who want to have access to their funds within a short space of time. Bonds are less volatile but also less likely to offer long-term growth, which means people who plan to own shares for 10 or 15 years are often best advised to buy funds predominantly containing stocks.
Every investor has a certain level of risk tolerance. In the investment arena, products that offer the highest returns also have the highest risks while investors who take minimal risks are likely to enjoy minimal returns. Determine your risk tolerance by imagining how you would feel if your investment lost value over the course of time. You should take less risk with money you are relying on to pay for future expenses. Money that is surplus to your needs can be subject to higher risk, depending on your risk tolerance.
Decide which sectors of the economy you are most comfortable investing in. Every mutual fund company has a family of funds, and each fund has an investment strategy. Some funds invest exclusively in securities issued in one nation, while other funds invest in securities from around the world. People who are in need of extra income can invest in funds that pay dividends derived from bonds or corporate stocks. Dividends on stocks may be higher than interest on bonds, but stock prices are also more volatile.
Review prospectuses from several different mutual fund companies. Most funds have pre-set mutual fund asset allocation models that are geared towards conservative, moderate, or aggressive investors. Conservative allocation models hold mostly bonds, aggressive models mostly stocks, and moderate models hold both stocks and bonds in roughly equal amounts. Within these three broad areas, you can find several mutual fund asset allocation models that meet your time frame and risk tolerance. Choose a mutual fund asset allocation model that holds securities from the sectors of the economy or parts of that world that you wish to invest in.