Asset allocation mutual funds

Asset allocation mutual funds let you own a mix of equity and fixed income securities to achieve a goal such as income generation or capital appreciation. 

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What is an asset allocation mutual fund?

These funds allocate a specific amount to fixed income and equities depending on the fund's goal. They typically offer income and growth potential in one fund. 

  • Most asset allocation mutual funds have a stated target for the amounts invested in fixed income and equities.  
  • The funds usually allow for some deviation from the stated target allocations but will rebalance back to the target allocation on a regular basis, such as monthly or quarterly.
  • Some asset allocation mutual funds allow for short-term adjustments to the target allocation to over- or under-weight portions of the portfolio based on market opportunity.

Why have asset allocation mutual funds in your portfolio?

Asset allocation mutual funds are an easy way for an investor to gain access to a well-diversified portfolio. Additionally, the adjustments to the asset mix, whether due to changing market conditions or regular rebalancing, are completed by a professional management team. 

What types of asset allocation mutual funds are there?

  • Balanced

    Balanced funds invest in a fairly even split of equity and fixed income securities, usually 60% equity and 40% fixed income. These funds typically have a goal of generating income while preserving capital.

  • Aggressive

    Aggressive asset allocation mutual funds generally invest more in equities than fixed income securities and have a goal of capital appreciation or growth. These funds are more suited to investors with a higher risk tolerance. 

  • Conservative

    Conservative asset allocation mutual funds hold more in fixed income securities than equities. These funds may also invest in dividend-paying equities. Many of these funds have a goal of achieving a high level of income.

What are the pros and cons of asset allocation mutual funds?

  • Pros

    All-in-one portfolio
    The fund can serve as an investor’s sole investment in a portfolio. 

    Asset allocation mutual funds are well-diversified portfolios that invest in a range of asset classes.

  • Cons

    Set allocations
    An investor does not have the ability to adjust allocations if their risk tolerance changes. 

What are other factors to consider when choosing an asset allocation mutual fund?

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    Risk tolerance

    Investors should consider the amount of risk they are willing to take when selecting an asset allocation mutual fund. Funds allocating a higher percentage to equities typically have more risk than the funds with a higher amount allocated to fixed income securities. 

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    Underlying securities

    These funds can invest in individual securities such as equities and bonds or hold a range of mutual funds or ETFs (exchange-traded funds) to achieve the desired portfolio allocation. A review of a fund's holdings can reveal information about the overall portfolio characteristics.    

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