Mutual funds are a group of professional investors who come together to pool their money as one entity to invest in appropriate stocks or bonds according to what earns them the most profits.
The meaning of dynamic asset allocation funds entails diversifying across various stocks and other assets, not just with the same class. For example, a fund could be equity-oriented, debt-oriented, and even commodity-based investments – then the percentages invested in each asset class are decided based on the best risk versus reward trade-off.
This article provides more details about dynamic asset allocation mutual funds and how you can decide on the best dynamic asset allocation fund.
Learn the Basics
Equity as an asset category is attached with significant volatility, which is one of the main reasons most investors avoid or under-allocate stocks, despite the asset class’s strong long-term return potential.
Investors concerned about high volatility can consider investing in funds that dynamically manage equity exposure based on assessment levels. This increases equity exposure when stocks’ prices are low and reduces investment risk in overpriced markets.
Historical evidence suggests that such a technique can let investors engage in the long-term growth potential of shares while reducing volatility.
Actively managed dynamic asset allocation funds, also called balanced advantage funds, invest in a mix of debt and equity-based on market movements.
Depending on their outlook, they reduce their allocations to equities and debt. Its ultimate objective is not to outperform pure equities strategies.
- Active and passive investments are combined in dynamic asset allocation.
- For mid to long time horizons, dynamic investment decisions should be chosen.
- Dynamic allocation funds provide predictable and low-volatility returns.
- These funds outperform standard instruments in terms of returns.
- Due to their regular rebalancing with market circumstances, these funds also alleviate investor concerns about stocks’ volatility.
Dynamic Asset Allocation Fund Meaning
Actively managed asset allocation funds dynamically, also referred to as balanced advantage funds, invest in a proportion of debt and equity-based on market movements. Depending on their outlook on the stock markets, they raise or reduce their exposure to equities and debt.
What are the Core Objectives of Investing in Dynamic Asset Allocation Funds?
Dynamic asset allocation funds serve two purposes.
First, they help if you experience market volatility within your portfolio by providing you with a manageable portion of your total investment. This way, you can better handle the fluctuations within the equity market and stay on the course of achieving your long-term investment goals.
Secondly, an asset allocation fund can invest in other asset classes besides equities like fixed income – this is helpful if you’re looking to avoid high levels of risk. With this combination strategy, investors can achieve good returns while minimising risk.
Did You Know?
To limit risk, these funds rely on an investing technique to modify the balance of equity and debt concentration on the stock market’s performance and current economic conditions.
What makes allocation funds dynamic?
Equity investments are made based on a handful of pre-determined investing parameters that include the equity anticipation of the investment, company size, valuation, and dividend yield. As a result, any time you’re looking for stocks to invest your money in, these stocks will have a reasonable price.
As stock prices rise, you can start selling your stock options and buying debt investments in the portfolio. In this way, your portfolio’s worst side is adequately safe while you enjoy the benefits of more profitable investments, and the fund’s structure becomes dynamic and flexible.
The importance of Dynamic Asset Allocation Funds
- Diversify: If you are the head chef of a famous restaurant, will you leave the “Chef’s special” among the other not-so-special dishes? We bet you won’t! The same goes for investment. Dynamic Asset Allocation funds help investors diversify their ‘savings’ by holding onto expertise from advisors. After all, what’s the point of hoarding up all your savings to risk losing them on one big investment?
- Great returns: DAA funds are a type of portfolio fund in which the cash flows from different asset classes have relative independence from market movements in other asset classes. Thus, the best dynamic asset allocation funds ensure better returns over more risky investments.
- Volatility: A rise or a fall of any market cannot be sustained forever. Dynamic Asset Allocation funds are not too volatile as they invest in multiple assets. However, they don’t offer returns as high as pure equity funds. Still, their downfall is less drastic than that of pure equity funds because of their diversification, which minimises the impact of volatility.
Did You Know?
- The portfolio model is based on several fundamental and technical factors, and it allows fund managers to adjust their equity allocation. Ideally, fund houses enhance equity in their portfolios when prices are low and vice versa.
Taxation consequences of Dynamic Asset Allocation Funds?
Asset allocation in a dynamic environment is taxed similarly to stock mutual funds. Long-term gains are taxable at 10%, even though short-term earnings (less than one year) are taxable at 15%. This makes them attractive to investors because they receive a tax-free return on their investments if the time frame is more than one year. They
will be subject to short-term capital gains tax if they do not keep them for this period.
What Should You Consider Before Investing in Dynamic Asset Allocation Funds?
As an investor, you have to be certain that you make an informed decision, and it shouldn’t burn a hole in your pocket.
You need to make sure that you’re getting your money’s worth, so you need to ensure that you are investing in the right place.
- Expectation On Returns: The best dynamic asset allocation funds are structured to assure an investor that the high-risk portions of the portfolio capacity would not have been used unnecessarily. Introducing equity allows the fund manager to use the higher risk portions to realise good returns in conducive market conditions. Dynamic allocation funds usually have extremely high volatility in long-term returns, but their short-term volatility (highest at about three months) might discourage some investors.
- Period Of Investment: An investor should aim to invest in dynamic asset allocation funds for a minimum duration of 3-5 years. This is because of the exposure to investing strategies that go through various market cycles. Only after a few years would you be able to make good returns if the investment were to be successful.
- Risk Assessment: It’s important to note the risks associated with dynamic asset allocation funds. They tend to have more of an even mix between equity and debt securities than other investment funds.
- Cost Of Investment: This includes the costs not only for you but for other parties as well, such as your team, and thus, it should be taken into account when considering an investment opportunity as a whole.
Dynamic Asset Allocation Funds in India
Though the Indian stock markets can be volatile, there are a couple of ways to make sure you’re making sound choices for investing. First and foremost, nothing can let your mind rest easier than diversifying your assets across several sectors or industries. The key to this is a balanced approach that doesn’t leave any particular area unaddressed.
Best dynamic asset allocation fund
- Edelweiss Balanced Advantage Fund
- ICICI Prudential Balanced Advantage Fund
- Aditya Birla Sun Life Balanced Advantage Fund
Did You Know?
The technique of calculation may differ from one fund house to the next.
Pros & Cons of Dynamic Asset Allocation Funds
- Higher returns due to active management.
- Adaptability to market fluctuations and variability.
- Ideal for risk-averse investors
- Recommended for the long term gestation period.
- Higher transaction and fund house cost.
- Bent to higher tax if the allocation is more to debt.
Word to remember
Asset rebalancing refers to making modifications to your asset allocation so that you profit from changes in market trends. For example, if stocks are performing well, you can allocate a higher portion of your portfolio to equities. If the stock is underperforming, you can devote a larger amount of your portfolio to debt to decrease volatility.
Dynamic asset allocation funds are ideal assets, especially for conservative investors. If you fall into this category but are willing to take on a limited level of risk, these funds can be a healthy place to invest. The heavy reliance on a fund manager’s expertise can sometimes be detrimental to the investor because it could lead to bias-based decision-making. However, in-house models and algorithms that help funnel trades through an investment process ensure that these funds are managed equitably based on sound logic.
An investor should consider some risks before investing in dynamic asset allocation funds: concentration risk and volatility risk, liquidity risk, interest rate risk, and credit risk.
Dynamic asset allocation funds fall under actively managed funds.
Risk tolerance, time horizon, and goal factors are some of the important goals that will have a long-term impact on an individual’s asset allocation.
A dynamic asset allocation strategy can be explained as an investment management strategy that keeps a check on your profits and losses to suit market conditions.
It is inclined in a major portion to equity of the market, which is flexible, keeps on changes and variable in nature as per market benefits and costs.