Allocation Rate

An allocation rate is a percentage of an investor's cash or capital outlay that goes toward a final investment. The allocation rate most often refers to the amount of capital invested in a product net of any fees that may be incurred through the investment transaction. An allocation rate may also be used when determining the percentage of income an investor plans to contribute to specified investments through an automatic investment plan.

The allocation rate is a percentage value that helps an investor measure the total amount of capital invested. It can be useful in helping an investor to measure the fees paid for investment in a product. It can also be a metric used for determining investments through an automatic investment plan.

Investors using full-service brokerage services will typically incur a sales load when buying and selling mutual funds. Sales load schedules are determined by mutual fund companies and disclosed in a fund’s prospectus. Sales loads can be front-end, back-end or trailing, and they will usually detract from the total amount invested in a product.

To determine the allocation rate of capital actually invested in a product, an investor can use the following equation:

(Total Investment - Fees Paid) / Total Investment

Calculating the allocation rate percentage helps an investor to better understand how their money is being utilized. It also shows how much they are actually investing in a product, which will form the basis for total assets invested and future capital gains.

For example, if a mutual fund carries a 4% front-end load, then only 96% of an investor's initial investment will actually be placed into the fund itself, with the rest being paid to the intermediary. The higher the fees, the lower the overall allocation rate for the investor.

Generally, an allocation rate will refer to a percentage of income an investor chooses to allocate to specific investments in an automatic investment plan. One of the most commonly tracked allocation rates is the allocation rate paid to a 401(k) from an employee’s paycheck. In many employee benefit plans, the employer will match the employee’s allocation rate up to a certain percentage.

Allocation rates can also be useful when making all types of investments through various automatic investment plans. Many investors choose to build their own retirement plans through an individual retirement account (IRA). Wrap accounts through both brokerage firms and robo advisors offer investors another alternative for making automated investments at a predetermined allocation rate.