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An asset allocation fund is
a mutual fund that seeks both current income and capital growth. While it may sound
similar to a traditional balanced fund, it's actually quite different.
A traditional balanced fund seeks to achieve a moderate level of both income and growth
through a diversified portfolio of stock, bond and cash investments. Balanced funds
generally have limits on how much of their assets can be in stocks at any given time.
These limits ensure that a balanced fund stays "middle-of-the-road" and never
becomes too aggressive (or too conservative).
An asset allocation fund, on the other hand, is like the balanced fund's daredevil cousin.
It seeks maximum levels of current income and capital growth. While some asset allocation
funds adhere to pre-defined guidelines about how much to invest in different vehicles
(stocks, bonds or cash), others retain complete flexibility to alter their allocation
depending on the fund manager's outlook and the performance of different financial
markets.
You should remember that, as a rule, it is never a good idea to invest in any fund until
you read its prospectus and understand the risks involved. This is especially true for
asset allocation funds, since investment policies vary widely from fund to fund. |
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