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What is asset allocation?

Asset allocation refers to the proportion of money a managed fund invests in the different asset classes. This is one of the most important things you need to look at when considering a fund that invests in more than one asset class.

An asset class is really just a type of investment. The main asset classes that people refer to are cash, fixed interest, property and shares. The reason why it's so important to understand asset classes is because they each have different levels of risk and return – the main criteria by which investors generally choose what they invest in.

Understanding what to expect from the different asset classes will help you decide which types of investments best suit your needs and investment timeframe. For example, investing in shares may deliver good returns over the long term (5+ years). But you should also be aware that the short term returns may fluctuate dramatically from day to day and it's very likely they will sometimes be negative. It is important to decide if this is something you feel comfortable with.

By investing in more than one asset class you can diversify your investments and reduce your risk.