Financial Glossary Header Image

Asset Allocation

Updated on March 16, 2023

Asset allocation is a commonly used investment strategy in mutual funds. Under this, funds aim to balance the risk and reward from investments by apportioning the pooled funds across assets as per the fund’s objective. Different asset classes will have different risk and return levels. Fund managers perform asset allocation to make use of the unique risk-return benefits offered by different asset classes.

Is asset allocation same as diversification?

These two concepts are often used inter-changeably but they different. Asset allocation involves selecting different assets and finalising how much to invest in them. Diversification focuses on ensuring various asset classes are included within a portfolio to ensure maximum returns and lowered risk levels.

Diversification focuses on broaded investment opportunities available in the market. For instance including debt, equity, derivatives, etc within a portfolio. Asset allocation narrows down to options available within an asset – for instance, investing pooled funds across large-cap, mid-cap, small-cap stocks.

Which is the best asset allocation strategy?

There is no right or wrong asset allocation and it depends on the fund’s objective and approach adopted by the fund manager. The end goal is to maximise returns and minimise risks.