What is an 'Asset Allocation Fund'

An asset allocation fund is a fund that provides investors with a diversified portfolio of investments across various asset classes. The asset allocation of the fund can be fixed or variable among a mix of asset classes. Popular asset categories for asset allocation funds include stocks, bonds and cash equivalents

BREAKING DOWN '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. The standard applications of modern portfolio theory investing include an efficient frontier of stocks, bonds and cash equivalents. Furthermore, modern portfolio theory outlines how a portfolio can vary its asset mix to tailor to the risk tolerance of the investor.

Asset allocation funds provide a simplified application of modern portfolio theory with varying allocations and combinations of assets for investors. One of the most common types of asset allocation funds is a "balanced fund." A balanced fund implies a balanced allocation of equities and fixed income, such as 60% stocks and 40% bonds. Investors will find numerous funds deploying the 60/40 mix as it has become a popular standardized strategy for investors seeking broad market diversification. Asset allocation funds also offer varying levels of diversification based on risk tolerance. Investors seeking additional investing categories beyond just 60/40 will find many options, including conservative allocation funds, moderate allocation funds and aggressive alloca­tion funds.

"Life-cycle" or "target-date" funds, usually 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 starts out with a higher risk-return position and gradually becomes less risky as the fund nears its targeted utilization 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 a variety of exchange-traded funds to represent different market exposures. Other funds may take a more active approach by using fundamental analysis to select top performing securities in each asset class. Overall, most funds will actively monitor and allocate securities in response to evolving market conditions and economic environments.

Investing in Asset Allocation Funds

Below are examples of some of the investment industry’s top asset allocation funds.

iShares Core Aggressive Allocation ETF (AOA)

The iShares Core Aggressive Allocation ETF is a tracker fund that seeks to replicate the performance of the S&P Target Risk Aggressive Index. The Fund invests in targeted ETFs that seek to replicate the Index. The Index is heavily weighted towards equities, targeting investors with high risk tolerance.

iShares Core Conservative Allocation ETF (AOK)

The iShares Core Conservative Allocation ETF is a tracker fund that seeks to replicate the performance of the S&P Target Risk Conservative Index. The Fund invests in ETFs that seek to replicate the Index. The Index is heavily weighted towards fixed income, targeting investors with a more conservative risk tolerance.

Vanguard Balanced Index (VBINX)

Investors seeking asset allocation funds will find a number of options with Vanguard. The firm’s Vanguard Balanced Index fund invests approximately 60% in stocks and 40% in bonds. Its holdings seek to track two indexes, the CRSP US Total Market Index and the Bloomberg Barclays U.S. Aggregate Float Adjusted Bond Index.

  1. Asset Allocation

    Asset allocation is the process of deciding where to put money ...
  2. Hybrid Fund

    A hybrid fund is an investment fund that is characterized by ...
  3. Asset Mix

    Asset mix is the breakdown of all assets within a fund or portfolio. ...
  4. Investment Ideas

    Investment ideas are specific views, plans or ideas on ways to ...
  5. Portfolio Management

    Portfolio Management is the art and science of making decisions ...
  6. Through Fund

    A type of target-date retirement fund whose asset allocation ...
Related Articles
  1. Managing Wealth

    6 Asset Allocation Strategies That Work

    Your portfolio’s asset mix is a key factor in its profitability. Find out how to achieve this delicate balance.
  2. Managing Wealth

    Achieve Optimal Asset Allocation

    Minimize risk while maximizing return with the right mix of securities and achieve your optimal asset allocation.
  3. Investing

    What Is Strategic Asset Allocation?

    A strategic asset allocation takes a long-term approach to help an investor achieve their financial goals. Here's how it works.
  4. Retirement

    3 Best Vanguard Target Retirement Funds

    Learn about three Vanguard target retirement funds that offer broad diversification and automatic rebalancing as investors get close to their retirement ages.
  5. Financial Advisor

    Top 4 Conservative Allocation Mutual Funds (VTMFX, TAIAX)

    Discover the top-rated mutual funds in the conservative allocation category, and learn which investors can utilize them most effectively.
  6. Managing Wealth

    VFIFX: Overview of Vanguard Target Retirement 2050 Fund

    Explore the Vanguard Target Retirement 2050 Fund and its investment objective, portfolio composition, management, performance and investment terms.
  7. Investing

    Asset Allocation Models: Comparing 3 Traditional Strategies

    Learn about the three most common asset allocation models: conservative, moderate and aggressive.
  8. Financial Advisor

    Best Performing Target-Date Funds

    Learn about the three best-performing target-date mutual funds (TDFs) from T. Rowe Price, Schwab and Vanguard with target dates around 2040 to 2045.
  9. Retirement

    An Introduction To Target Date Funds

    Target date mutual funds can be an alternative to bonds and CDs for investors who do not wish to actively manage their savings. The reason: These financial products periodically reallocate fund ...
  10. Investing

    VFFVX,VTTVX: Vanguard Target Date Funds Overview

    Learn about target-date retirement funds offered by Vanguard. Discover how portfolio managers automatically rebalance the portfolios for the funds.
  1. Which mutual funds have the lowest fees?

    Discover why index mutual funds are generally less expensive than actively managed funds and learn about three of the lowest-cost ... Read Answer >>
Hot Definitions
  1. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  2. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  3. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  4. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  5. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
  6. Sharpe Ratio

    The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Trading Center