Definition of asset allocation fund

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What is an asset allocation fund?

An asset allocation fund is a fund that offers investors a diversified portfolio of investments in various asset classes. The fund’s asset allocation can be fixed or variable among a combination of asset classes, which means that it can be held at fixed percentages of asset classes or allowed to overweight some depending on market conditions. .

Popular asset classes for asset allocation funds include stocks, bonds and cash equivalents which can also be distributed geographically for additional diversification.

Key points to remember

  • Asset allocation funds are a product of modern portfolio theory.
  • Standard investment applications of modern portfolio theory include an efficient frontier of stocks, bonds, and cash equivalents.
  • An asset allocation fund attempts to create an optimal portfolio given an investor’s risk tolerance.
  • There are potentially endless variations in asset allocation funds. The funds will all seek optimal diversification, but they all have different combinations of asset classes and follow unique internal rules.
  • Some of the more common asset allocation funds include balanced funds and target date funds.
  • Investors can access asset allocation funds by purchasing shares of mutual funds or exchange traded funds (ETFs).

Understanding an asset allocation fund

Asset allocation funds were developed from modern portfolio theory. Modern portfolio theory shows that investors can achieve optimal returns by investing in a diversified portfolio of investments included in an efficient frontier.

Standard investment applications of modern portfolio theory include an efficient frontier of stocks, bonds, and cash equivalents. Additionally, modern portfolio theory describes how a portfolio can vary its asset mix to accommodate an investor’s risk tolerance.

Types of asset allocation funds

Asset allocation funds offer a simplified application of modern portfolio theory with variable asset allocations and combinations for investors.

One of the most common types of asset allocation funds is a balanced fund. A balanced fund involves a balanced allocation of stocks and fixed income securities, such as 60% stocks and 40% bonds. Investors will find many funds deploying the 60/40 mix as it has become a popular standardized strategy for investors looking for broad market diversification.

Asset allocation funds also offer different levels of diversification depending on risk tolerance. Investors looking for additional investment categories beyond just 60/40 will find many options, including conservative allocation funds, moderate allocation funds, and aggressive allocation funds.

Lifecycle or target date funds, typically used in retirement planning, are also considered a type of asset allocation fund. These funds are managed with a targeted mix of asset classes that start with a higher risk / reward position and gradually become less risky as the fund approaches its target use date.

After determining a targeted asset allocation, funds can manage their investment selection in a number of ways. Some funds may choose to invest in various exchange-traded funds (ETFs) to represent different market exposures. Other funds may take a more active approach by using fundamental analysis to select the best performing stocks in each asset class.

Overall, most funds will actively monitor and allocate or rebalance securities in response to changing market conditions and economic environments.

Popular asset allocation funds

Below are examples of some of the best asset allocation funds in the investment industry.

  • The iShares Core Aggressive Allocation ETF (AOA): The iShares Core Aggressive Allocation ETF is a tracking fund that seeks to track the performance of the S&P Target Risk Aggressive Index. The fund invests in targeted ETFs that seek to track the index. The index is heavily weighted in equities, targeting investors with a high tolerance for risk.
  • IShares Core Conservative Allocation ETF (AOK): The iShares Core Conservative Allocation ETF is a tracking fund that seeks to replicate the performance of the S&P Target Risk Conservative index. The fund invests in ETFs that seek to track the index. The index has a strong fixed income focus, targeting investors with a more conservative tolerance for risk.
  • The Vanguard Balanced Index (VBIAX): Investors looking for asset allocation funds will find a number of options with Vanguard. The company’s Vanguard Balanced Index fund invests around 60% in stocks and 40% in bonds. Its holdings seek to track two indices, the CRSP US Total Market Index and the Bloomberg Barclays US Aggregate Float Adjusted Bond Index.


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