Single-Fund and Multifund Allocation Considerations
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Single-Fund and Multifund Allocation Considerations
When developing an asset allocation strategy with mutual funds, it is important to consider whether it is more advantageous to use a single mutual fund or many mutual funds. There are many factors to consider, not the least of which is cost.
Things To Know
- Advantage of the single-fund approach: cost.
- Advantage of the multi-fund approach: selection.
The single-fund approach
It is probably no secret that the primary advantage of the single-fund approach to asset allocation is cost. By using a single asset allocation fund, the investor may experience only a one-time front-end or back-end sales charge (if any), and perhaps a modest 12b-1 fee—an annual fee based on the fund’s total net asset value. 12b-1 fees are used to offset reduced sales charges and to cover some of the administrative costs of the fund.
The multi-fund approach
On the other hand, the multi-fund investor will likely pay front- or back-end sales charges for each fund selected, as well as ongoing annual fees. Additionally, each time he or she makes a change in the allocation, this may involve the liquidation of one fund’s shares and the purchase of another. Such transactions can have costs associated with both the sale of the old shares and the purchase of the new ones. However, in exchange for these higher costs, investors can be far more selective and targeted in the investments and management expertise they purchase. For many, this is an acceptable tradeoff.
