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Asset Allocation or Balanced Mutual Funds

They might be called "asset allocation" funds or "balanced" funds. Either way, they employ a fairly simple principle – diversification. But like so much else in the financial world, these types of mutual funds have become increasingly varied and sophisticated.

Asset allocation and balanced funds offer a one-stop, professionally managed way to diversify among stocks, bonds, and cash. Each fund is authorized to hold all three asset classes, but the proportions will vary from fund to fund based on the fund's mandate, the managers' style, and current market views.

These funds play two key roles for investors:

  • As a ready-made portfolio. The instant portfolio approach is useful for new investors with limited assets, or those who want to benefit from investment returns, but have no interest in making investment decisions. These funds can also be useful if you change jobs and roll a relatively small amount of pension money into a locked-in Registered Retirement Savings Plan (RRSP) – or Locked-In Retirement Account (LIRA) – that must be kept separate.
  • As a core holding. Here, the fund provides a ready-made conservative base to which you can add other, more aggressive investments with the potential to generate higher returns.

Strategic vs tactical

Generally, balanced funds and asset allocation funds fall into two broad categories.

  • Strategic asset allocation funds are most common. Strategic allocation involves determining an ideal ratio of equities to bonds – usually somewhere between 60/40 and 40/60 – and maintaining it. The portfolio's holdings may change, but the weighting tends to vary only slightly.
  • Tactical asset allocation funds tend to change allocations more often and can make bigger moves. Some can even go as much as 100% into stocks or bonds, as the managers try to time the market for maximum returns.

Different styles

While these funds are generally conservative vehicles, managers vary widely in their investment styles. Some favour small- and mid-cap stocks or high-yield bonds, while others stick to large-cap stocks and investment-grade bonds. Some base stock selection on fundamental value, while others use more aggressive growth or momentum strategies. They may focus on Canadian investments, foreign investments, or a mixture.

Making your choice

There are hundreds of balanced and asset allocation funds available – plus about 75 asset allocation programs that offer similar one-stop diversification. Make sure you know whether you're buying a strategic or tactical fund.

Professional advice can help you select a fund, or funds, in keeping with your investment objectives, time horizon, and risk level.

Contact your BlueShore Financial financial advisor today to review your portfolio and create the best investment strategy for you.

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Mutual funds are offered through Credential Asset Management Inc. Mutual funds and other securities are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance may not be repeated.

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