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Single-Fund and Multifund Asset Allocation Models

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Single-Fund and Multifund Asset Allocation Models

When considering mutual funds as the vehicle for asset allocation, an investor will need to decide whether to use the single-fund or the multifund approach.

Things To Know

  • The single-fund approach uses a single asset allocation mutual fund.
  • The multifund approach uses a number of funds with different objectives.

How the single-fund approach works

As the name implies, the single-fund approach uses a single asset allocation mutual fund, which spreads its portfolio among a wide variety of investments. Some of the investments in this type of fund include domestic and foreign stocks and bonds, government securities, cash, gold, and real estate stocks. Although the mix of asset classes can vary widely from one fund to the next, this diversification is meant to lower risk while providing favorable, competitive returns. Additionally, some funds maintain a fairly constant mix, making few changes, while other funds alter their mix based on market conditions.

How the multifund approach works

In the multifund approach, the investor establishes investment positions in a number of funds with quite different objectives. While the intent is to establish the same kind of diversification and a broad mix, investors using this approach are often more interested in taking advantage of the management expertise of particular fund managers or fund families. In other words, rather than accepting a somewhat generic mix of growth stocks, income stocks, and fixed investments, these investors are seeking to duplicate specific historical performances by handpicking their investments.