The study sought to determine the effect of macroeconomic factors on asset allocation decisions of mutual funds in Kenya. The study employed correlation and regression analysis to establish the relationship between the variables. The findings revealed that macroeconomic factors significantly affect asset allocation decisions. The regression model had an R Square of 0.903, indicating that 90.3% of the variation in asset allocation decisions is explained by the macroeconomic factors included in the model. The interest rate had a significant negative effect on asset allocation decisions (β = -0.640, p = 0.000), while the exchange rate had a significant positive effect (β = 0.533, p = 0.000). Inflation had a weaker but still significant negative impact (β = -0.120, p = 0.041), and unemployment showed no significant effect (β = 0.000, p = 0.996). These results suggest that interest rates and exchange rates are the most influential factors in determining how mutual funds allocate their assets, while inflation has a smaller effect, and unemployment has no notable effect. The study concluded that mutual funds in Kenya respond strongly to changes in interest and exchange rates, adjusting their asset allocation strategies to reflect prevailing macroeconomic conditions. The findings highlight the need for policymakers to stabilize interest rates and ensure a favorable foreign exchange environment to support diversified asset allocations by mutual funds. Fund managers should also closely monitor these variables to optimize their portfolio strategies. Recommendations include maintaining stable interest rates to support portfolio diversification and encouraging mutual funds to adopt foreign exchange risk management strategies. Suggestions for further research include expanding the range of macroeconomic factors considered, conducting comparative studies across different countries, and incorporating qualitative methods to capture the decision-making processes of fund managers.
