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What Is an Asset Allocation Fund?

A man picking an egg out of a basic.

You’ve likely heard the adage “Don’t keep all your eggs in one basket.” Asset allocation lets you carry out that guidance in how you invest. Learn more about what asset allocation is and how an asset allocation fund can help your portfolio stay diversified.

What Is Asset Allocation and How Can It Help Me?

Asset allocation refers to how your portfolio is divided across big investment categories known as asset classes, which include stocks, bonds and cash-equivalent investments. Each asset class has its own characteristics that affect performance: Stocks and bonds tend to rise and fall in value at different times, and the best-performing investment changes year after year.

Rather than chasing performance, a better long-term strategy may be to position your asset allocation for a variety of market conditions.

How Is Diversification Different From Asset Allocation?

Spreading your money among the variety of investments within each asset class is how you seek diversification. Your personal situation should play a part in your decisions. A proper investment mix is based on your goals, risk tolerance and time frame.

Why Does Having a Diversified Portfolio Matter?

Diversification is the cornerstone of a sound investment strategy. It gives you the potential to benefit from some big gains (but not all) and experience just some (and not all) of the big losses from underlying securities when various events cause stock market volatility. The end goal is a smoother pattern of performance and less anxiety for you.

How Asset Allocation Portfolios Work

Diversifying your own investments can be difficult, especially when you’re just starting to invest. Asset allocation funds (aka fund-of-funds) invest in other mutual funds instead of individual stocks, bonds and money markets. They've grown more popular, especially when markets are volatile, because they may offer:

  • A balanced portfolio.

  • One convenient package.

  • Professional money management.

  • The goal of helping investors reduce overall risk in their portfolios.

Decorative Image - Standard Mutual Fund

One Fund Example –
All Growth Stocks

Cola X company stock

Hi-Tech company stock

ABC Car company stock

Decorative Image - Asset Allocation Fund

One Fund Example –
Mix of Underlying Funds

Underlying Bond Funds
Inflation Protection, International, High-Yield, Investment-Grade

Underlying Stock Funds
Growth, Value, International, Small-Cap, Large-Cap, Individual Sectors

Underlying Case Equivalent Funds

For illustrative purposes only, does not represent an actual standard mutual fund or asset allocation fund.

A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus. Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Individual mutual funds generally have many holdings within them in an effort to achieve their goals.

Consider the Benefits

An asset allocation fund offers advantages that may not be available through an individual mutual fund.

More Balance

With an asset allocation fund, your portfolio gets exposure to more securities by spreading your investments across a number of mutual funds. Those underlying funds invest in different types of assets across market sectors, industries and securities. This diversification may reduce your portfolio's overall risk and volatility.


Many mutual fund companies require that you invest a minimum amount of money. If you invest in several different funds, you may need a significant amount of money to meet those minimums. With an asset allocation fund, you invest in many different kinds of assets for only one fund minimum.

Easier Money Management

It can be easy to lose track of how you’re invested if your money is spread among different funds. For example, how much of your money is invested in technology companies? An asset allocation fund gives you one place to check in on your portfolio.


You make one investment choice with an asset allocation fund. Professional money managers construct the portfolio and decide how much of each asset it will hold. Then they manage the fund, including rebalancing when needed. There's less paperwork and recordkeeping for you to manage. Also, choosing one provider can make it easier when you buy or sell funds or do your taxes.

Asset Allocation Fund vs. Designing Your Own Portfolio

Why choose an asset allocation fund over building your own portfolio? Asset allocation funds offer diversification in one investment and an easier way to manage your investments. Other differences include:

Asset Allocation Fund

  • Simple recordkeeping.

  • Monitoring one fund's performance.

  • Professionals rebalance.

  • Managed to specific risk levels.

Traditional Mutual Fund Portfolio

  • Recordkeeping for many funds.

  • Monitoring performance of many funds.

  • Rebalancing your own portfolio.

  • Risk depends on which funds you choose.

Choosing a Portfolio

Interested in investing in an asset allocation fund? Generally, there are two ways to choose:

Risk-Based Portfolios: Choose the fund based on the amount of risk you want to take. Risk-based portfolios have a preset allocation and are periodically rebalanced to keep that allocation and risk level consistent.

Target-Date Portfolios: Choose the portfolio by the approximate year you will need the money. Each year, the asset mix and weightings are adjusted to become more conservative as the target-date approaches. With target-date portfolios, the principal value of the investment is not guaranteed at any time, including at the target date.

Understanding Asset Allocation Performance and Risk

The performance of an asset allocation portfolio depends on how its underlying funds perform. Those funds are subject to market volatility and, depending on the types of assets in which they invest, may be subject to additional risks that come with investing in specific market sectors or securities.

If the underlying fund also includes international securities, the portfolio may also experience currency and exchange rate risks. As with any investment, the value of the asset allocation fund's shares will fluctuate and may fall below your original investment.

The Bottom Line

Managing your investments, including diversifying your holdings, can be tough to tackle on your own. Investing in an asset allocation fund can give you the benefit of a balanced portfolio that's managed by professional money managers, in one convenient fund choice. This investment may help you manage risk and potentially weather the markets' natural ups and downs.

One Choice Portfolios®

Signature target-date and target-risk asset allocation fund-of-funds from American Century Investments.

The target date in a fund's name is the approximate year when investors plan to retire or start withdrawing their money. The principal value of the investment is not guaranteed at any time, including at the target date.

Each target-date fund seeks the highest total return consistent with American Century Investments' proprietary asset mix. Over time, the asset mix and weightings are adjusted to be more conservative. In general, as the target year approaches, the portfolio's allocation becomes more conservative by decreasing the allocation to stocks and increasing the allocation to bonds and cash equivalents.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

Diversification does not assure a profit nor does it protect against loss of principal.

Rebalancing allows you to keep your asset allocation in line with your goals. It does not guarantee investment returns and does not eliminate risk.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.