Asset Allocation — Mutual Fund Term Explained

How you distribute investments across asset classes — equity, debt, gold. The single biggest factor in long-term portfolio returns and risk.

Asset allocation is the process of dividing investments among different asset classes — equity, debt, gold, REITs, etc. Research shows that asset allocation accounts for most of a portfolio's long-term returns.

A common rule of thumb: subtract your age from 100 to get the equity percentage.

Related terms

• Rebalancing — Periodically restoring your portfolio to its target asset allocation by selling outperformers and buying underperformers.
• Diversification — Spreading investments across different assets, sectors and geographies to reduce risk. Often called the only free lunch in investing.
• Risk Appetite — Your willingness and ability to accept potential losses in exchange for higher returns. The fundamental factor in choosing the right fund.

Browse the full mutual fund glossary, or see this concept in action in the fund screener.