What it means
The defining feature is that the mix, not the individual stock picks, is the product. An investor buying a 60/40 fund is buying a rule about how much sits in shares and how much in bonds, and the manager's job is to run money inside that rule.
There are three broad styles. A static fund holds fixed proportions and rebalances back to them, a tactical fund lets the manager shift within set bands when markets look stretched, and a target date fund follows a glide path that reduces risk automatically as a chosen retirement year approaches.
The practical appeal is that rebalancing happens without anyone having to act. Selling what has risen and buying what has fallen is simple in principle and difficult in practice, and a fund removes the decision from the investor entirely.
Fees deserve attention because these funds sometimes charge twice. A fund of funds levies its own management fee on top of the fees inside the underlying funds it holds, so the headline figure can understate the real annual cost by a meaningful margin.
The limitation is that a standard mix cannot know your circumstances. An investor with a large mortgage, an unpredictable income or a taxable account may need a different balance from the one the fund assumes, and the fund has no way to take account of assets held elsewhere.
In practice
Real-world examples.
Example
A 55 year old holds a target date 2035 fund inside her workplace pension. Over the following decade the fund shifts automatically from roughly 70% shares to roughly 45%, without her ever logging in to make a change.
Example
A company pension scheme uses a single multi-asset fund as its default option for the 80% of staff who never choose an investment. The trustees monitor one fund rather than thirty, and members who do want choice can opt out into a wider range.
Example
A small charity with a $1,200,000 reserve puts it into a 60/40 balanced fund rather than assembling its own portfolio. The trustees avoid the cost and governance burden of running an investment committee for a fund of that size.
Formula
Calculation
Fund return = sum of (weight of each asset class x return of that class)
Net return = fund return - total annual charges
A balanced fund holds 60% in shares, 35% in bonds and 5% in cash. Over one year the shares return 9%, the bonds 4% and the cash 2%.
The weighted return is (0.60 x 9%) + (0.35 x 4%) + (0.05 x 2%) = 5.4% + 1.4% + 0.1% = 6.9%.
An investor with $250,000 in the fund therefore earns $250,000 x 0.069 = $17,250 before charges. The fund's total annual cost is 0.55%, or $250,000 x 0.0055 = $1,375, leaving a net gain of $17,250 - $1,375 = $15,875. That is a net return of $15,875 / $250,000 = 6.35%, so charges absorbed 0.55 percentage points of the 6.9% earned.Case study
Seen in the real world.
The following is an illustrative and entirely fictional example. The Wrenfield Community Trust, an invented local charity, held a $2,000,000 endowment invested 90% in shares and 10% in cash because a former treasurer believed bonds were a waste of return.
In a sharp market fall the shares dropped 30% while the cash earned 5%. The share holding fell from $1,800,000 to $1,260,000 and the cash rose from $200,000 to $210,000, giving a total of $1,470,000, a decline of $530,000 or 26.5%. The trustees had to cancel a year of grant making.
They moved the endowment into a 50/50 asset allocation fund. Modelling the same market fall against the new mix, $1,000,000 of shares would have fallen to $700,000 while $1,000,000 of bonds rose 5% to $1,050,000, a total of $1,750,000 and a decline of 12.5%. The fictional trustees accepted a lower expected return in exchange for a grant programme that could keep running through a bad year.
Watch out
Common mistakes.
- Buying several asset allocation funds at once, which usually produces an unintended overall mix rather than extra diversification.
- Reading only the headline management fee of a fund of funds and missing the charges applied inside the underlying holdings.
- Assuming a target date fund is safe on the target date, when most glide paths still hold a meaningful share of equities well past retirement.
Questions
People also ask.
What is the difference between a balanced fund and a target date fund?
A balanced fund keeps roughly the same mix indefinitely, while a target date fund gradually reduces risk as a named year approaches.
Is a single asset allocation fund enough for a whole portfolio?
For many ordinary investors it is, provided the mix suits the time horizon and the investor does not hold a large concentrated position elsewhere.
Do these funds protect against losses?
No, they reduce the size of typical swings by spreading money across asset classes, but a fund holding shares will still fall when share markets fall.
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