An asset allocation mutual fund is a type of investment fund owned by several investors but managed by a financial organization. The theory governing the operation of these funds is that profits are maximized by exploring opportunities in all of the traditional venues of investments. Generally, stocks, bonds, and cash equivalent investments are all represented within this type of fund. However, the ratio of these investments can vary with market conditions.
The primary difference between individual asset allocation funds and asset allocation mutual funds is the amount of decision-making power. When individuals are managing their own funds either personally or through a financial adviser, they can choose individual investments. They can also adjust the portfolio ratios between high-risk and low-risk options to fit their life situations.
Conversely, investing in an asset allocation mutual fund removes the ability to make those decisions. However, mutual funds are managed by teams of financial experts that likely have a greater amount of pooled knowledge than the lay investor can readily access. Often, individuals spread their investments among several proven funds. This can reduce risk while giving individuals a wider range of potential investments.
In theory, buying into an asset allocation mutual fund can provide all the benefits of self-management. Younger people often choose funds that are traditionally stock heavy. These provide the greatest potential for profit but involve the most risk. Most of the time, the risk is more acceptable to these investors because there is sufficient time to regain the money before retirement.
In contrast, those approaching retirement age often choose an asset allocation mutual fund that relies heavily on bonds and cash equivalent ventures. In most cases, these individuals have built the majority of their retirement accounts and are seeking primarily to earn money to cover cost of living increases. High amounts of risk are generally unacceptable by these investors.
A balanced asset allocation mutual fund is generally acceptable for those who have average risk-tolerance thresholds. In these mutual funds, the moneys are split primarily between stocks and bonds. Sometimes, a small percentage is allocated to cash investments to increase security. This type of fund historically has enjoyed consistently modest profits. In times of recession or financial crisis, however, these mutual funds can be the hardest hit.
Many people manage multiple asset allocation mutual fund investments in much the same way that they manage individual funds. These individuals begin by investing in aggressive, higher-risk mutual funds. As they age, they withdraw their money and reinvest in progressively lower-risk funds.