Since the financial market is volatile, we cannot risk all our investment in a single entity like bonds, equities or money markets. This is where Asset Allocation fund comes into the picture. A single mutual fund that can be invested in a variety of securities in different asset classes is termed as Asset Allocation Funds. This fund can give us diversity in investment and also a strong tool for risk management.
One basic form of Asset Allocation fund is Balanced fund. Here an investor can buy a combination of common/preferred stocks and bonds under a single mutual fund. This also provides with both income and capital appreciation with respect to avoiding excessive risks associated with investing. Usually 60% of investment is done on stocks while the other 40% is invested on bonds but other percentage fixation is also available.
Generally they can be classified into two different Asset allocation schemes.
Strategic asset allocation scheme: This is a basic mix of investment. Here an optimal balance is achieved between investing in different options.
Tactical asset allocation scheme: Here the market and economic variations are tracked periodically and the asset allocation is changed depending on the investor’s options.