Asset allocation fund

Asset allocation funds are a type of mutual fund that invest money across various asset classes like stocks, bonds, and cash based on their risk tolerance and investment goals.
EXPLORE FUNDS
What is asset allocation fund?
EXPLORE FUNDS
3 min
17-September-2024
An asset allocation fund is a mutual fund or ETF that diversifies investments across various asset classes like stocks, bonds, and cash. Its allocation can be fixed or flexible, depending on the fund's strategy. This approach balances risk and reward by maintaining a set proportion of investments based on factors such as your risk tolerance, financial goals, and time horizon. In this article, we’ll explore what an asset allocation fund is, how it works, its different types, benefits, and taxation aspects to help you understand its potential advantages for your investment portfolio.

What is Asset Allocation Fund?

An asset allocation fund is basically a balanced mutual fund in which investors put their money in a balanced way into equities and bonds. The majority of seasoned investors adopt the asset allocation strategy for redistributing their risk burden and also to increase their earnings.

Similar to other mutual funds, an asset allocation fund is managed by a professional manager, who perpetually tracks the market to accordingly apply the appropriate strategies for asset allocation that suit the requirements and objectives of the fund’s investors.

Features of Asset Allocation Fund

What sets an asset allocation fund apart from other assorted mutual funds is its varied features and the benefits that come with it. The fund works on the idea that enhancing the percentage of a particular asset or multiple asset classes in a particular investment portfolio helps the investor hedge against all risks that are associated with a particular asset class.

The key features of an asset allocation fund are given below:

  • Maximum returns by investing in a highly diversified portfolio.
  • The total asset mix can be manipulated to suit the investor’s appetite for risk and prevailing market conditions.

Different types of asset allocation funds

Such funds are of three types, namely:

Dynamic asset allocation funds

Dynamic asset allocation funds continue changing the proportions of several assets in a given investment portfolio to cope with market force changes and fluctuations. For instance, when a certain asset class is predicted to perform well in future, allocating more funds towards that particular asset class could favourably impact returns and also enhance the investor’s portfolio at large.

Target date funds

Target date funds are typically managed with an asset class mix that comes with high risk-reward concentrations. This risk concentration usually decreases as the maturity date approaches. Target date funds are also called life-cycle funds and are used more for planning retirement funding.

Static asset allocation fund

In this type of mutual fund, a predetermined percentage is set on several asset classes at the time of the initial investment. This predetermined percentage guides the total volume of investment in that asset class. Balanced funds are some of the most popular static asset allocation funds, making 65:35 investments in debt and equity.

Benefits of an Asset Allocation Fund

More scope to diversify

The investor gets a better opportunity to diversify his portfolio and this makes an asset allocation fund more attractive to both seasoned and inexperienced investors. Moreover, diversification helps in minimising the investor’s risk burden. Through asset allocation in mutual funds, investors are able to put in their money in several asset classes to expand their respective portfolios based on their needs.

Protection against market volatility

Since the market for investments is a highly volatile space, the performance of asset classes can be highly unpredictable. Hence, it is always prudent to diversify a portfolio over several asset classes, and selecting a fund that chooses to invest in separate classes can help the investor cushion the negative impacts of a volatile market. Moreover, he is also assured of a steady income that may remain unaffected by market forces.

Enhanced earnings

It is ultimately the ROI that motivates an investor to part with his money. If one chooses an asset allocation fund, he also improves his chances of earning a better return on his investment. Since the asset allocation mutual fund investor’s portfolio gets exposed to separate asset classes, it works in his favour to ensure higher returns. For instance, if the fund’s debt portion underperforms or yields negligible returns, the investor still stands to earn more than an investor in an all-debt fund as the earning from other assorted asset classes makes up for this loss.

Taxation on asset allocation funds

Any asset allocation fund is subject to taxation. The taxation is the same as on debt funds, and any short-term gain is included in the taxpayer’s gross income to be subsequently taxed according to his income tax slab. For any long-term gain of more than three years, the taxation is 20% along with indexation.

However, the tax structures for debt funds, fixed deposits, and bonds vary, and investors must be familiar with these separate tax structures of equity and debt classes to construct their portfolios to balance the taxes on it effectively. If you are an investor and want to start your investment journey, you may visit the Bajaj Finserv Mutual Fund platform to learn more about mutual funds and SIPs. Feel free to make use of their Lumpsum calculator and SIP calculator to calculate your financial goals better.

Frequently asked questions

What are asset allocation funds?
An asset allocation fund, also called a lifecycle or target-date fund, is an investment fund that is designed to adjust its asset allocation automatically over time on the basis of an investor's targeted retirement date or any other assorted financial goals.

Is asset allocation fund good?
An asset allocation fund may be a suitable option for investors, particularly for those who opt for a hands-off investing approach or may not be equipped with the expertise or time to manage their respective investment portfolios actively. Such funds enhance diversification, provide an all-in-one and simple investment solution, automatically adjust their asset allocations with time, manage risk effectively, and are professionally managed.

What is the difference between balanced funds and asset allocation funds?
Both asset allocation funds and balanced funds provide enhanced diversification. A balanced fund typically maintains fixed allocations to bonds and stocks, whereas an asset allocation fund adjusts its asset allocation on the basis of the financial goals and target date of the investor. Asset allocation funds manage risk more dynamically and are used often for retirement savings.

What is the most successful asset allocation?
There is no most successful asset allocation as it depends on several factors like an investor’s risk tolerance, financial goals, market conditions, and time horizon.

What is the fund of funds asset allocation?
A strategy for Fund of Funds (FoF) asset allocation involves investments in portfolios of other assorted investment funds instead of directly investing in individual securities such as bonds or stocks. A FoF is essentially an exchange-traded fund (ETF) or mutual fund that holds a mix of other funds that have been diversified rather than an individual asset.

What is an example of a balanced portfolio?
A balanced portfolio comprises a mix of bonds, cash equivalents, and stocks in proportions for providing a blend of income and growth, while simultaneously managing risk also. The allocation to a particular asset class varies on factors like the investor's investment objectives, time horizon, and risk tolerance.

How do you keep your portfolio balanced?
Keeping a portfolio balanced involves periodical review and adjustment of asset allocation to maintain the desired investment mix.

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