An asset allocation mutual fund is where the investor’s portfolio is a mix of three asset classes. These are bonds, stocks, and cash equivalents in a selection of securities. These asset classes can be fixed, or can change in response to a changing economy or investment market.
The aim of an asset allocation mutual fund is to balance the risk by diversifying assets amongst the major categories. All of these categories carry different levels of risk. One category may be increasing in value while another is decreasing or staying the same.
An asset allocation mutual fund enables the small investor with only a limited amount of capital, to gain access to professionally managed portfolios. The investment objectives are stated in the portfolios prospectus. All the shareholders are equally liable for profits or losses of the fund. An asset allocation mutual fund is sold in units, or shares and these may be sold or purchased at the current net asset value per share. You may see this written down as NAV or NAVPS.
If you invest in an asset allocation mutual fund then you can decide on the risk return trade off. It can be tempting to choose assets that appear to have the highest rate of return, but these may also be the riskiest. If you decide that your risk tolerance is quite high then you could put more assets into stocks. If you cannot cope with any short term fluctuations in the market then you should invest more in bonds and other lower risk equities.
How you choose to invest may also depend on your personal goals. For instance if you are planning for retirement twenty years down the line then you could cope with any short term fluctuations. If you are planning for a short term goal, such as purchasing a new car then you should invest your asset allocation mutual fund into safer fixed income type investments.
Whatever you are planning to save for, it is far better to start your asset allocation mutual fund as soon as possible. Research from the US department of Labor has shown that if you delay saving for ten years you will have to save three times as much each month in order to catch up. This is not just due to the effect of compound interest, but takes into account that you can invest in higher yielding, but potentially risky investments. If you have a bad year during a twenty five year savings plan the overall effect will be negligible on your asset allocation mutual fund, and you will not feel it.