Definition
The term asset allocation fund refers to a portfolio of equities, bonds, and cash equivalents in a proportion that fulfills a specific investment objective. The allocation of assets in these funds can remain fixed or they may vary over time to fulfill its objective.
Explanation
Asset allocation funds offer individuals the ability to select from a variety of investment objectives that are defined by the proportion of assets allocated to each asset type. For example, an asset allocation fund's investment objective could be capital appreciation, and a large portion of the fund's assets would be allocated to equities. Blend funds are just one type of asset allocation fund, and typically allocate 60% of assets to equities and 40% to bonds.
The investment objective of an asset allocation fund will not only determine the portfolio's mix of assets, but also whether or not they vary over time. A blend fund's allocation of assets to each investment type will usually remain fixed over time. Target date funds, also known as life cycle funds, typically change the allocation of assets over time. For example, a life cycle fund might allocate a larger proportion of assets to stocks in the near term, moving towards a larger proportion of assets in fixed income securities over time. In doing so, these funds offer the investor the opportunity to enjoy capital appreciation in the near term and income in the future.
Since asset allocation funds can vary a great deal in terms of investment objective, investors choosing these funds will have a variety of risk tolerance scores.