When it comes to no load funds there are two types of asset allocation, and these are passive or active asset allocation. Each of these types may be right for some investors, and many no load funds use the active style. Asset allocation is an important component of investing, and will affect the portfolio performance. A diverse portfolio with many asset classes will normally perform better than one that is limited in diversity. This is because while some sectors of the market are falling others are normally rising, balancing out the results and reducing the risks because of market volatility. One drawback that the active strategy has is that there are more trades within the portfolio, and this can drive up the costs. The passive method will allocate the assets and then leave them alone most of the time.
Active asset allocation involves frequently changing the diversity and make up of the investment portfolio, in an attempt to get better returns because of changing market conditions. Those against this method point out that it is not possible for any investor to tell exactly how any asset will perform in certain market conditions, and that active allocation increases the risks and costs of the fund without raising the returns by a substantial amount. This is impossible to tell in some cases though. Every investor agrees that asset allocation is important, but the method used for this will vary from one investor to the next.
Changes to the portfolio asset allocation may be needed at times, but these changes should not occur regularly without having a specific reasoning behind every change made to the portfolio. Active asset allocation is used by many investors so that returns are improved. The point of active asset allocation is that the risks of investment are reduced because the portfolio is changed frequently to reflect market conditions, and the returns for the investment may increase. Some investors may change the asset class percentage of the portfolio, while others may just change the percentages held in each class. The argument against active asset allocation is that the market is usually efficient, so frequent changes are not normally needed to protect the investment portfolio.
Many no load funds use active asset allocation to try and improve the returns for the fund participants, but this step may also increase the investment costs and fund expenses as well. Whether you choose a no load fund that involves active asset allocation or you go with a fund that uses the passive method instead will depend on your personal preferences. There are numerous no load funds which use either method, so your decision will not limit the fund choices you have. It is also a good idea to research the manager or professional who makes the asset allocation decisions, and evaluate their experience and track record in this area. The type of asset allocation a no load mutual fund uses is just one of the variables that should be examined before you choose the right no load funds for your investment purposes.
