Asset Allocation Fund
An investment strategy that balances the risk and rewards of an individual’s portfolio by apportioning it to other asset classes by taking into consideration individual goals, risk appetite, and investment horizon is referred to as asset allocation. The fund that provides investors with a diversified portfolio of investments across various asset classes is called an asset allocation fund. The three main asset classes are equity, fixed income, and cash equivalents.
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Features of Asset Allocation Funds
- Goal simplification: Goals need to be simplified and one must have a clear understanding as to when he would plan to retire and what is his risk appetite.
- Risk and returns balance: If the allocation is implemented correctly, one can have higher returns depending on his risk appetite and risk aversion.
- Percentage of allocation: All the funds should not be allocated in one asset class as it is risky. Hence certain percentage of amount has to be allocated in each asset class so as to avert risk.
- Period of investment: Time is money hence the term of investment has to be chosen wisely. Asset allocation helps you to play safely while investing over a period of time.
- Picking off quality stocks: A direct investor would not invest in a stock about which he has very little or no knowledge. A thorough check about the performance of the stocks helps an investor pick up high rewarding stocks.
Types of Asset Allocation Funds:
1.Target Date Funds:
These funds are also known as life cycle funds and are used for retirement planning. In these types of funds, the risk concentration tends to decrease on approaching maturity. It contains a specific mix of asset classes that roll out with a high-risk reward concentration.
2. Dynamic Asset Allocation Funds:
In these types, the funds tend to change the proportion of various asset classes in a particular investment portfolio. Investors can cope up with fluctuations and changes in the market.
3. Static Asset Allocation Funds:
In these funds, a pre-fixed percentage is assigned to various asset classes, right from the beginning. This percentage indicates the proportion up to which investments will be made in that particular asset class.
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Popular Examples:
- The iShares Core Aggressive Allocation ETF (AOA): It is a tracker fund that seeks to replicate the performance of the S&P Target Risk Aggressive Index. It is heavily weighted towards equity, targeting high-risk-tolerance investors.
- The iShares Core Conservative Allocation ETF (AOK): It is a tracker fund that seeks to replicate the performance of the S&P Target Risk Conservative Index. It is heavily weighted towards fixed income, targeting conservative risk tolerance investors.
- The Vanguard Balanced Index (VBINX): This index invests approximately 60% in stocks and 40% in bonds. CRSP US Total Market Index and the Bloomberg Barclays U.S. Aggregate Float Adjusted Bond index are the two indexes that are tracked by vanguard holdings.
Bottom Line:
Asset allocation is one of the important investment strategies to balance the risk of the portfolio. It is the most important determinant of portfolio returns. Diversifying investments across non-correlated assets helps in reducing risks and increasing returns. If debt and equity are invested in the right mix, they will provide good returns with lower risk and volatility in the long term.
Author: Urvi Surti
About the Author:
Urvi is a commerce graduate and has a keen interest in Finance. She has completed her Chartered Wealth Management (CWM) from the American Academy of Financial Management and is currently pursuing a career in Financial Risk Management (FRM).
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