Download Mutual Funds Investment

MUTUAL FUNDS
Mutual Funds Definition refers to the meaning of Mutual Fund, which is a fund,
managed by an investment company with the financial objective of generating
high Rate of Returns. These asset management or investment management
companies collects money from the investors and invests those money in
different Stocks, Bonds and other financial securities in a diversified manner.
Before investing they carry out thorough research and detailed analysis on the
market conditions and market trends of stock and bond prices. These things help
the fund mangers to speculate properly in the right direction.
The investors who invest their money in the Mutual fund of any Investment
Management Company, receive an Equity Position in that particular mutual
fund. When after certain period of time, whether long term or short term, the
investors sell the Shares of the Mutual Fund, they receive the return according to
the markeconditions.
The investment companies receive profit by allocating people's money in
different stocks and bonds according to their Speculation about the Market Trend.
Other than some specific mutual funds which carry certain Maturity Term,
Investors can generally sell the shares of their mutual funds at any time they
want. But, the return will vary according to market value of the stocks and bonds
in which that particular mutual fund made investment. But, generally the share
holders of mutual fund sell their share when the prices are up and Capital Gain
is sure to happen.
Scope of Mutual Funds
Scope of Mutual Funds has grown enormously over the years. In the first age of
mutual funds,when the investment management companies started to offer
mutual funds, choices were few. Even though people invested their money in
mutual funds as these funds offered them diversified investment option for the
first time. By investing in these funds they were able to diversify their investment
in common stocks, preferred stocks, bonds and other financial securities. At the
same time they also enjoyed the advantage of liquidity. With Mutual Funds, they
got the scope of easy access to their invested funds on requirement.
But, in todays world, Scope of Mutual Funds has become so wide, that people
sometimes take long time to decide the mutual fund type, they are going to invest
in. Several Investment Management Companies have emerged over the years
who offer various types of Mutual Funds, each type carrying unique
characteristics and different beneficial features.
To understand the broad scope of Mutual Funds we need to discuss the main
types of Mutual Funds that are normally offered by the Mutual Companies.
The wide choices in Mutual Funds go as the following:
Equity Funds or Stock Funds These types of Mutual Funds generally invest in
stocks which are publicly traded. Amount of risk, involved with these funds vary
according to different types of Equity Funds.
Types of Equity Funds are;
1. Growth Funds-These funds invest in the stocks, which are under valued
compared to their worth. As these stock prices tends to rise in future and
carry good growth potential, Growth Funds go for these kind of stocks.
2. Value Funds-These funds go for long term investment and aims at
increase of value over the years.
3. International Equity Funds-These funds invest in the stocks of foreign
companies.
4. Global Equity Funds-These funds invest in stocks of both the domestic
market and the foreign markets.
5. Sector Funds or Specialty Funds-These funds invest in specific sectors
like Health care and in specific commodities like Gold.
6. Index Funds-These funds reflect the performance of stock market indexes.
Bond Funds These funds invest in government bonds and corporate
bonds. These Bond Funds offer a steady source of income and in many
times these incomes get the advantage of Tax Exemption.
Money Market Funds These funds invest in the money market. These funds
involve low level of risk and promises comparatively low rate of return.
History of Mutual Funds
History of Mutual Funds has evolved over the years and it is sure to appear as
something very interesting for all the investors of the world. In present world,
mutual funds have become a main form of investment because of its diversified
and liquid features. Not only in the developed world, but in the developing
countries also different types of mutual funds are gaining popularity very fast in a
tremendous way. But, there was a time when the concept of Mutual Funds were
not present in the economy.
There is an ambiguity about the fact that when and where the Mutual Fund
Concept was introduced for the first time. According to some historians, the
mutual funds were first introduced in Netherlands in 1822. But according to
some other belief, the idea of Mutual Fund first came from a Dutch Merchant
ling back in 1774. In 1822, that idea was further developed. In 1822, the concept
of Investment Diversification was properly incorporated in the mutual funds. In
fact, the Investment Diversification is the main attraction of mutual funds as the
small investors are also able to allocate their little Funds in a diversified way to
lower Risks.
After 1822 in Netherlands, the Mutual Funds Concept came in Switzerland in
1849 and thereafter in Scotland in the 1880s. After being popular in Great Britain
and France, Mutual fund concept traveled to U.S.A in the 1890s. In 1920s and
1930s, the Mutual Fund popularity reached a new high. There was record
investment done in mutual funds. But, before 1920s,the mutual funds were not
like the modern day mutual funds.
The modern day mutual funds came into existence in 1924, in Boston.
Massachusetts Investors Trust introduced the Modern Mutual Funds and the
funds were available from 1928. At present this Massachusetts Investors Trust is
known as MFS Investment Management Company. After the glorious year of
1928, Mutual fund ideas expanded to different levels and different regulations
came for well functioning of the funds.
Still today, the funds are evolving and improving in order to offer people much
wider choices and better advantages for fulfillment of their various investment
needs and financial objectives.
Growth of Mutual Funds
Growth of Mutual Funds has been gradual and it took really long years to
evolve the modern day mutual funds. Mutual Funds emerged for the first time in
Netherlands in the 18th century. Then it got introduced to Switzerland, then
Scotland and then to United States in the 19th century.
The very idea of mutual funds came from the urge to deliver a form of
Diversified Investment Solution. Over the years the idea developed and people
received more and more choices of Diversified Investment Portfolio through
the mutual funds.
When in 1924, Massachusetts Investors Trust first introduced mutual funds in
U.S, they found it difficult to gain the trust of the investors. It was very natural
that the people took time to adapt to a new investment idea. There emerged some
confusions regarding the Taxation of Investment Income from mutual funds as
there was no Regulation or legislation.
Laws started to came in existence from 1940s. The the result was not immediate.
The Mutual Fund Concept achieved warm reception only in the middle of 1950s.
By the end of fifties and in first half of 1960s mutual fund investment triggered
up tremendously.
Monetary Funds benefited a lot from the mutual funds. Earlier investors was
used to invest directly in the stock market and many times suffered from loss due
to wrong Speculation. But, with the mutual funds which were handled by
efficient Fund Managers, Investment Risks was lowered by a great extent. The
diversified investment structure of mutual funds also diversified risk and this
contributed tremendously in the Growth of Mutual Funds.
Over the years not only the new types of mutual funds emerged, the way, in
which mutual funds were sold also changed. But, the Growth of Mutual Funds
has not stopped. It is continuing to evolve to a better future, where investors will
get newer opportunities.
Mutual Funds Investment
Mutual Funds Investment has became a subject of great importance in the
present context, especially when all the investors are keen to diversify their
investment to maintain a balance between Investment Return and Investment
Risk. Mutual Funds Investment not only provides the customers with their much
desired diversified investment portfolio, but also offers the benefit of high
liquidity. Investors are free to sell their mutual fund shares any time to get the
back the amount that was invested in the mutual funds. It is another issue that any
time sell of mutual fund shares may result in poor rate of return.
For gaining the Diversified Investment Solution and the liquidity advantage,
any person needs to invest in Mutual Funds. But, before investing their hard
earned money one needs to carry out sincere research on the performance of
those mutual funds, he is considering to invest in.
The things that one needs to consider before deciding on any particular mutual
fund are the following:
Performance of the Fund and the Rate of Returns
It is perhaps needless to say that one requires to be well informed about the Fund
Performance before investing. Excellent Performance not only means high Rate
of Return, it also needs the consistency. The funds which have been proved of
being able to generate satisfactory rate of return consistently over a period can be
considered for investing.
Investment Psychology of the Mutual Fund
Before taking final investment decision one needs to to know about the
Investment Psychology of the mutual fund. The investment psychology of the
fund has to match with the Financial Objective of the customer. A track record
of excellent performance and high rate of returns cannot be the only yard stick
to judge whether that fund is suitable for the particular investor or not.
Risk Adjustment
It is also very important to check that how the funds adjusted with risk over the
years.
Fund Management
Management of funds is the ultimate thing and it in many ways depend on the
efficiency of the Fund Mangers who actually allocates asset by making
Speculation based on the market research and market analysis.
Mutual Fund Fees
Investors should be well prepared about the fees and charges associated with
Mutual Funds. There are Loaded Funds and No Load Funds. Loaded Funds are
those mutual funds which involve Sales Charges and other fees and No Load
Funds are those which carries no charges.
Opportunities of Mutual Funds
Opportunities of Mutual Funds are tremendous specially when investment is
concerned. For any individual who intends to allocate his assets into proper forms
of investment and want to diversify his Investment Portfolio as well as the risks,
Mutual Funds can be proved as the biggest opportunity.
Investors gets a lot of advantages with the Mutual Fund Investment. Firstly, they
are not required to carry on intensive research and detailed analysis on Stock
Market and Bond Market. This work is done by the Fund Mangers of the
Investment Management Company on behalf of the investors. In fact, the
professional Fund Managers who handle the mutual funds of any particular
company, are able to speculate the market trend more correctly than any common
individual. Good Speculation about the trends of stock prices and bond prices
leads to right allocation of funds in the right stocks and bonds resulting in good
Rate of Returns.
Investors also get the advantage of high Liquidity of the mutual funds. This
means the investors can enjoy easy access to the funds invested in the mutual
funds whenever they require the money. When the investors invest in any mutual
fund, they are given some equity position in that fund. The investors can any time
sell their mutual fund shares to get back the money invested in mutual funds. The
only thing is that the Rate of Return that they will get may not be favorable as the
return depends on the present market condition.
The greatest opportunity that the mutual funds offer is the opportunity of
diversifying their investments. Investment Diversification actually diversifies
the Risk associated with investment. This is because, if at a time, if prices of
some stocks are declining, deceasing the Value of Investment, prices of some
other stocks and bonds may tend to rise and in this way the loss of the mutual
fund is offset by the strength of the stocks whose prices are rising. As all the
mutual funds diversify their investments in various common stocks, preferred
stocks and different bonds, the risk to be borne by the investors are well
diversified and in other terms lowered.
Challenges Facing Mutual Funds
There are many Challenges Facing Mutual Funds which is of prime concern to
the people who have an investment spree.
People find mutual fund investment so much interesting because they think they
can gain high rate of return by diversifying their investment and risk. But, in
reality this scope of high rate of returns is just one side of the coin. On the other
side, there is the harsh reality of highly Fluctuating Rate of Returns. Though
there are other disadvantages also, this concern of fluctuating returns is most
possibly the greatest challenge faced by the mutual fund.
The Issue of Fluctuating Returns
In spite of being a diversified investment solution, mutual funds investment in no
way guarantees any return. If the market prices of major shares and bonds fall,
then the value of mutual fund shares are sure to go down, no matter how
diversified the mutual fund portfolio be. It can be said that mutual fund
investment is somewhat lower risky than Direct Investment in stocks. But, every
time a person invests in mutual fund, he unavoidably carries the risk of losing
money.
The Other Challenges

Diworsification or Over Diversification- In order to diversify the
investment, many times the mutual fund companies get involved in Over
Diversification. The risk of holding a single financial security is removed by
diversification. But, in case of over diversification, investors diversify so much
that many time they end up with investing in funds that are highly related and
thus the benefit of risk diversification is ruled out.

Taxes-Every year, most of the mutual funds sell substantial amount of
their holdings. If they earn profit by this sell, then the investors receive the
Profit Income. For most of the mutual funds,the investors are bound to pay
taxes on these incomes, even if they reinvest the income.

Costs- Most of the mutual funds charge Shareholder Fees and Fund
Operating Fees from the investors. In the year, in which mutual fund fails to
make profit and the investors get no return, these fees only blow up the losses.
Mutual Funds Vs Individual Stocks
Mutual Funds Vs Individual Stocks has always been a debatable issue. While
some like to play safe with mutual fund investment, some others prefer
investment in individual stocks.
When any investor invests in any mutual fund all that he is required to do is pay
the Shareholder Fees and Fund Operating Fees. The whole work of managing
funds, starting from Market Research and analysis of stock and bond price and
recent market trends up to final Allocation of Funds or assets in various stocks
and bonds is completely done by the Professional Fund Managers employed by
the Investment Management Company. In this case, the fund management
remains in the hands of the fund managers of the mutual fund company. But, in
case of Direct Investment in individual stocks, the total control remains in the
hands of the individual investors.
But, most of the people agree about the fact, that mutual funds hold some
important benefits over and above Individual Stocks. So, to get the actual
depiction of Mutual Funds Vs Individual Stocks,we will discuss the advantages
put forwarded by Mutual Funds.
Diversification
The greatest advantage the mutual funds hold over individual stocks is the
characteristic of Diversification. The core concept of mutual funds is to Diversify
Investment in order to lower the risk of investing. As the mutual funds allocate
their funds into stocks of different companies and in different bonds, the risk is
diversified. If at a time, market price of some particular stocks fall, the loss of the
mutual fund may be offset by the rise in price of some other stocks held by that
particular mutual fund. But, individual stocks do not hold this advantage of
diversification. If the prices of the stocks go down in the market, the investor is
sure to lose money.
Professional Management and Efficiency
As mutual funds are managed by the professional fund managers who are
specialized in their field, they carry out the research and analysis work much more
efficiently and naturally speculate more correctly about the market trends of stock
prices and bond prices. In the other case, Individual Stock investment is done
directly by the investors who are in most cases common men who don't have much
knowledge about the stock and bond markets.
Other than this as the mutual funds get a lot of money from people to invest in,
they can reap the benefit of Economies of Scale with the large sum of invested
money.
Average Annual Return
Average Annual Return refers to the return of a mutual fund which is measured
as an average after deducting the mutual fund's operating Expense Ratio. These
expenses do not contain the Sales Charges of the mutual fund. In many cases of
Mutual Fund Investment, the investors are required to pay Transaction
Brokerage Commissions for their Investment Portfolio. But, these commissions
are not counted for at the time calculating the Average Annual Return.
This Average Annual Return is actually a figure which is represented in
percentage and is used to reveal a particular mutual fund's historical return.
Generally, Average Annual Return of a mutual fund shows the average returns
of the fund over last three years or five years or ten years. A fund can also
calculate the Average Annual Return on the basis of its returns for the whole
life of the fund.
It is a clear fact that Average Annual Return is not a compounded rate of return.
Annual Returns of a fixed number of years is added and divided by the number of
years, to get the figure of Average Annual Return and when the returns are
considered, the Expense Ratios are subtracted to get the net value of returns.
This Average Annual Return calculation is necessary to get a clear idea about
the Reinvested Dividend. Capital Gain Distribution is also related with
Average Annual Return.
The figure of Average Annual Return, is not only important for the mutual
Fund Managers and the investment company but also for the individual and
institutional investors. The investors can get an idea about the performance of a
particular mutual fund in the long term, by studying the Average Annual Return
figures of the mutual fund over different periods. It can be mentioned here that
though the Average Annual Return figure is really important, the investors
should also check out the annual returns of the mutual fund that they are
considering to invest in. This is because, an impressive Average Annual Return
does not necessarily imply consistency of good annual returns.
Automatic Investment Plan
Automatic investment plan is an investment mechanism through which
investors will be able to invest a small amount of money at regular intervals. It
can alternatively called as systematic investment plan. Normally funds are
automatically invested in a retirement or mutual fund account. This is done by
way of deduction from the savings or checking account. Automatic investment
plan also enables the investors to transfer a set of their amount electronically to
another account at an assigned number of occurrences. Automatic investment
plan can be regarded as an effective systematic mechanism as because these
investments are of manageable size and investors will be able to save their money
as well.
Some examples of automatic investment plan
Examples of automatic investment plan can be mutual fund contribution, stock,
automatic withdrawal plan etc.
Some effective guidelines as recommended by economists
It is recommended that the investors should invest at a regular interval and this
will protect their accounts from any sort of market fluctuations. Investors should
purchase maximum shares when they observe that the prices are going low and
they should purchase the minimum shares if it goes high. But the best way is to
purchase shares when investors think them most capable.
Investors should analyze a lot before going for any investment and should opt for
those, which have a uniform track record and benchmarks. This way investors
will be able to instill a method of practice to save their investments.
The truth
It has been observed that inflation increases the prices of commodities and reduce
the value of money. That is why investors should choose the best investment type
to avoid the effect of inflation. In the long run the average price per unit can be
lesser than the average market price of the fund and this will enable the investors
to buy a higher amount of units at an average market price. This will improve
the volatility.
Automatic Reinvestment Plan
Automatic reinvestment plan is a mechanism normally used by mutual funds
that enable investors to buy additional shares using their dividends or
distribution out of their capital gains. Automatic reinvestment plan also enable
the one to electronically transfer his amount from one account to another. It can
alternatively be defined as an agreement through which dividends from mutual
fund or capital gains are utilized to buy additional fund shares.
Working principle
Individual can mechanically deposit his amount into his checking account
through this automatic reinvestment plan mechanism. In this systematic plan,
the fund manager reinvest the amount earned by the investor into his mutual
fund account. Investors can get the added advantage by adopting this
mechanism, as this will enable him to acquire more shares and at the same time
they can avoid excess taxes. In automatic reinvestment plan mechanism, the
capital gains produced by the fund can be utilized to mechanically buy more
fund shares rather than dispensing these to the investors in form of cash.
Advantage from investors point of view
This automatic reinvestment plan enables the investors to acquire more
investment gains, as after some period of time, the extra value produced by this
automatic reinvestment can produce a significant amount.
Advantage from company's point of view
This automatic reinvestment plan can make a smaller company to a larger one,
as through this mechanism, any capital and dividends made from the initial
investments can enable the company to buy more shares in the fund and it is a
continuing process.
Advice by experts
Investors should at first look at the prospectus and go through that section where
there are matters about automatic reinvestment plan. Secondly, they should
confirm the matter that their mutual fund is utilizing this automatic
reinvestment facility. They can consult with the fund manager for further
clarification. Investors should also discuss with the fund manager about tax
liabilities etc.
Assets Under Management
Assets under management or AUM is a type of financial service which is used
to estimate and approximate the money involved in an investment. Most of the
financial services establishments utilize this technique to measure their success
rate. Financial establishments normally use this assets under management
service to judge their the amount of money they are managing through
investment management, money management and mutual funds. Financial
companies compare their success rate with other financial establishments and
while doing this they use assets under management instead of revenue.
Factors behind asset under management
The prime factors responsible behind this policy of assets under management
are foreign exchange movements, structural effects of the company, market
performance gains / losses, Net New Assets (NNA) etc. Out of these factors, the
most effective one is NNA or Net New Asset. NNA is the amount of money
come from any new investment by a client. Investors prefer to use this NNA for
its user effectiveness. Investors sometime prefer to calculate the NNA growth,
which is a demonstration showing the relationship of NNA with the previous
AUM balance. NNA growth is alternatively defined as organic growth.
Normally the analyst use this assets under management philosophy to ascertain
investment ratings.
Market performance gains or losses are determined by measuring the
performance level in accordance with the improvement or declination of stock in
a market.
Alternative definition of asset under management
Asset under management can alternatively be defined as the overall value of the
assets as ascertained by the manager of hedge fund, mutual fund or any
portfolio manager. In general it can be said that assets under management is
the market value of assets which are managed by any financial establishment on
behalf of investors.
Assets under management can be interpreted differently by some financial
establishments. They sometimes use mutual funds or bank deposits while
measuring the value of the assets. Some other organizations use this philosophy
of assets under management, when their clients assigns this responsibilities to
them.
Asset Management Fund
The Asset Management Fund or AMF Fund is actually a mutual fund, in which
shares are sold without any commission. Asset management fund primarily
deals with client's investment. This fund is specifically made for clients to
provide some special privileges like access to an array of products. These special
facilities are not for average investors. Normally the financial establishments
invest on behalf of its clients.
Alternative definition of Asset management fund
The asset management fund can alternatively defined as an account at any
financial establishment which comprise of some facilities like credit cards,
debit cards, loans, checking etc. The asset management fund also enable the
clients to automatically transfer their amounts that goes beyond a certain level
into a higer interest earning account.
Asset management fund is alternatived called as central asset account or an
asset management account.
Striking features
Some of the prominent features of Asset management fund are:
Asset management fund expenses are normally confined to high deserving
individuals, business firms, governments, or financial negotiator. The expenses
are based on products like fixed income, equity, real estate, agriculture etc.
Somebody, when deposits his money into his account is normally put into a
money market fund. This money market fund usually offers more return in
comparison to other regular money market account like checking and savings
accounts.
One of an extra benefits of this asset management fund is that any person can
process his banking service and at the same time he can invest at the same
establishment without opting for a separate bank or brokerage account of
different establishments.
Most of the asset management funds provide both the investment services and
risk management service with high-quality client service facilities.
Some of the leading asset management companies like ABN AMRO asset
management (India), AMF etc. provide the investors numerous investing options
like hedge funds, mutual funds, pension plans etc. through which clients can meet
their demands.
Asset Size
Asset size can be defined as the overall market value of the securities in a
portfolio of mutual fund. This asset size is normally used to explain the size of
the fund. In practice, the bigger asset size does not necessarily mean a better asset
or good quality assets. There are so many factors responsible to make an asset as
the better asset. Some the the prime factors behind a quality asset are good
management policy, compatibility, and the manner of investment.
Some features of asset size
The above philosophy does not always match, as sometimes the bigger asset may
be treated as the better asset. In case of assets like index, bonds, or some money
market funds, the expenses are normally distributed over more investments and
are very liquid in nature. That is why these assets may sometimes be treated as
the better assets. The indexes actually are the statistical measurement of change
in the securities market. Every indexes have their own set of methodology and
are normally expressed by a change from a base value.
Asset size can be alternatively be stated as the overall amount of dollars invested
in the fund at a particular time. Most of the funds measure their asset on monthly
basis, irrespective to the size of the funds and the companies.
Some guidelines regarding asset size as recommended by the economists
Investors should be aware of certain things before they going to handle any asset
size related issues. These are:
People should try to avoid large fund establishments that have no prior history
of closing funds
Investors should look for the good management policies and portfolio schemes.
Large market capitalization stocks are normally manages effectively.
Some of the large size asset making foundations are: Bill and Melinda Gates
foundation, J. Paul Getty Trust, Robert Wood Johnson Foundation and Lilly
endowment Inc.
Asset Class, Asset Classes
An asset class is a set of securities that show similar characteristics and behavior
in the market. The group of securities in an asset class is also governed by the
same rules and regulations.
Asset classes can be broadly classified into two types, namely defensive and
growth oriented. The first category comprises assets that generate safe and
consistent returns. The assets in the defensive asset class are suitable for investors
who are not willing to take high risks. Growth oriented asset classes match the
profile of long-term investors who do not fear risks. Their aim is to generate
higher returns.
Types of Asset Classes
Asset classes are of the following types:
Shares: A share, also called equity, is a stake or a unit of ownership that an
investor can buy in a company. Usually, the returns yielded by shares are much
higher than that of other asset classes. Investment in shares is quite flexible as
they can be traded easily. However, the investment in shares is risky due to price
fluctuations. Investing in shares is suitable for long-term investors who are
willing to take risks.
Property: Investing in immovable property in the form of a residential or
commercial building or land is suitable for long term investors. Investing can
take place by purchasing the property directly or by investing in a property trust
fund. Property investment is not usually flexible as it requires sufficient time to
buy or sell property.
Cash: This type of asset class includes everyday bank transactions and short-term
investments in the money market. Cash investments reduce the overall risk in an
investment portfolio as investors can easily access their capital. However, the rate
of return in cash investments is the lowest. There is very limited scope for capital
growth.
Fixed interest assets: These assets yield fixed rates of return until the expiry of
the maturity period. Examples are bonds and certificate of deposits (CDs). The
level of risk associated with fixed interest assets is low. So, the rate of return of
these assets is usually lower than that of shares and real estate. An added benefit
is that fixed interest investments can be converted to cash whenever required.
This asset class is usually preferred by those who have low risk appetite.
Asset Allocation
The various investment vehicles available to an investor offer a distinct riskreward trade off. Asset allocation is in an investment strategy that seeks to create
a balanced portfolio in which an investor holds different types of assets to
actively manage risk and reward profiles.
Investments can broadly be divided into three asset classes, namely stocks, fixed
income and cash. Of these, stocks are the most volatile, offer the highest returns
and have the highest risk profile. Fixed income assets, such as bonds and
certificates of deposit (COD), are less volatile, but offer more modest returns.
Cash assets are the safest and represent the lowest risk profile.
Measuring Asset Allocation
Asset allocation depends on the income, risk appetite and circumstances of the
investor. While a conservative investor would prefer a high ratio of fixed income
investments in the portfolio, an aggressive investor would prefer to allocate more
funds into stocks. The various factors that can influence asset allocation are:

Time Horizon: This refers to the duration for which you can keep funds in
your investment account. An investor who can spare capital for a long term can
opt for riskier, long-term investments, whereas those who might need cash in
the near term can seek investments from which funds can be withdrawn
without incurring losses.

Risk Tolerance: This factor takes into account an investor’s ability to take
risks. A conservative or risk averse investor would favor investments in which
his/her capital is preserved, whereas an aggressive investor can risk losing his
investment to generate higher profits.

Rebalancing: This factor involves resetting the proportion of asset class to
the original ratio at regular intervals in case market fluctuations alter the initial
distribution of money.
Importance of Asset Allocation
Each asset class represents a distinct level of risk and returns, and behaves
differently with time. By spreading investments over different asset classes, an
investor can protect the capital invested against significant losses in case the
trends in a specific class move unfavorably. Diversification is a risk management
technique that aims at distributing investments over various options.
Diversification can be achieved by:

Spreading investments over asset classes, such as stocks, mutual funds,
bonds and cash.

Spreading investments in one asset class over various options. For
instance, investments in stocks can be spread over various sectors, such as
software, telecommunications, pharmaceuticals and automobiles.

Spreading investments across geographies, such as investing in stocks
from different states and purchasing global bonds.