Mutual fund experts recommend asset allocation funds to new investors who want to invest in mutual funds without anypreferred asset class in mind. This article is a guide to investing in asset allocation funds.
So let’s understand how investing in an asset allocation fund can help you achieve your financial goals.
What is an asset allocation fund?
An asset allocation fund is a fund that offers individuals with a diversified portfolio of mutual fund investments across various asset classes like bonds, stocks, and cash. The process of determining the appropriate mix of assets for a portfolio depends on multiple factors like the investor’s objectives and financial goals, risk appetite, investment horizon, etc.
The asset allocation of the mutual fund can be fixed or variable among a blend of asset classes. This means that it could be held for a fixed percentage of asset classes or perhaps allowed to go overweight on a few assets depending on the market conditions.
Types of asset allocation funds
Asset allocation funds offer a simplified application of modern portfolio theory with varying combinations and allocations for investors. One of the most common types of mutual funds in asset allocation funds is a balanced fund.
A balanced fund denotes a balanced allocation towards fixed income and equities, such as 40% bonds and 60% stocks. Asset allocation funds also offer varying levels of diversification based on the risk appetite of investors. Individuals are offered additional investing categories like moderate allocation funds, conservative allocation funds, and aggressive allocation funds.
Target-date funds or life-cycle funds, which are usually used in retirement planning, are also considered as a type of asset allocation fund. These funds are endowed with a target mix of asset classes which start-out with a substantial risk-return position and gradually becomes less risky as the fund nears its maturity.
Why is asset allocation important?
An investor can be protected against significant losses by including different asset categories with varyinginvestment returns that might move up and within a particular portfolio.
Historically, the yields associated with 3 major asset classes – equities, fixed income, and cash equivalents or money market instruments – have not moved up and down simultaneously. Market conditions that might cause one asset class to do well often result in another asset class performing averagelyor poorly.
By investing in different asset classes, you diversify risk and the chances to incur loss also diminish. This will ensure that your portfolio’s overall investment returns enjoy a smooth ride.
The practice of spreading your investments in mutual funds to mitigate risk is known as diversification. By choosing the right pick of investments, you might be able to limit your losses and shrink the fluctuations of investment returns without having to sacrifice too much on the potential gains.
Asset allocations funds are a great way to achieve your financial goals. Select the asset allocation fund that you believe best meets your financial planning and needs. You can always heed the advice of an expert if you are confused with which asset allocation fund should you go about. Happy investing!
Remember, the sooner you start with an SIP the better! Happy Investing!