What is an Asset Allocation Fund?

An asset allocation fund is a type of mutual fund that makes it possible for investors to create an intentional combination of different assets, with the goal of achieving a balanced portfolio. Most models for this type of fund involve creating this mixture of investments with the use of stocks, bonds, and cash equivalents. This combination or mixture may utilize fixed as well as variable assets to achieve the balance desired by the investor.

Proportion plays a major role in the management of an asset allocation fund. Some funds of this type are structured so that a constant percentage balance is maintained between the classes of assets within the portfolio. For example, the balance may involve a mixture of 70% stocks, 25% bonds, and 5% cash equivalents. Fund managers will strive to maintain this balance, while observing the investor’s wishes in regard to volatility or risk associated with different investment options. This means that investors who are willing to take on additional risk may choose to use the bonds to serve as the foundation or grounding for the asset allocation fund, since bond issues tend to provide stable and predictable returns. At the same time, the investor takes on more speculative stocks that carry greater risk in hopes of generating higher returns and significantly increasing the value of the portfolio.

In some cases, an asset allocation fund will allow investors to rearrange the proportions or percentages of each type of asset included in the portfolio. This means that if economic conditions dictate, the investor may choose to increase the proportion of bonds within the fund while reducing the proportion of stocks. Funds generally have specific regulations regarding how to go about adjusting proportions, including how often this type of activity can take place within a given calendar year.

Another approach to an asset allocation fund involves arranging the assets so that the investor takes on less risk as the years go by. This strategy is often referred to as a life cycle fund, or a target-date fund. With this method, a young adult may choose to go with high-risk investments early on, but become more conservative as he or she approaches retirement. This strategy increases the potential for generating larger returns earlier in life, when there is more time to offset any losses that may occur. At the same time, the incremental decrease in risk means that the worth of the assets contained in the portfolio are less likely to lose value, providing the investor with a greater degree of financial security.