Benefits of Mutual Funds in Asset Allocation
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Benefits of Mutual Funds in Asset Allocation
Some four hundred years ago, author Miguel de Cervantes wrote, "’Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket." While it is safe to assume these words were not written in reference to asset allocation, they well could have been. Asset allocation is the practice of dividing investment assets among different markets to achieve diversification and a balance between risk and return, consistent with an investor’s objective. One of the best ways to diversify a given sum of money is to invest it into one or more mutual funds, each of which will have a relatively high number and mix of individual holdings.
Things To Know
- One of the best ways to diversify a given sum of money is to invest it into one or more mutual funds.
How mutual funds accomplish diversification
Through a combination of asset classes—cash, bonds (and other fixed instruments), and common stocks—mutual funds afford an investor diversification and professional management. History has shown that the markets for different asset classes often do not move in unison. An "up" period for one class might be a "down" period for another. Holding assets in different classes can "smooth out" these variations. In this way, too, asset allocation can significantly reduce overall portfolio volatility (risk) and, in many instances, offer better long-term performance and returns than portfolios confined to a single asset class.
