Summary

Dynamic asset allocation funds adjust the investment portfolio between equity and debt assets according to the market conditions. Read this post to understand them in detail.

Content

Equity is known for its long-term wealth-creation potential. But it can also be volatile. Debt, on the other hand, can generate moderate returns with significantly lower volatility. Thus, an investor needs a combination of equity and debt to reduce volatility and build a well-rounded portfolio.

But how should an investor divide the portfolio between equity and debt? With a dynamic asset allocation fund, you don’t have to get into finding the ideal equity/debt allocation as a professional fund manager can handle this complex task on your behalf. Let’s have a detailed look at dynamic asset allocation fund meaning; it's working, and more-

What is a Dynamic Asset Allocation Mutual Fund?

Dynamic asset allocation fund is one of the seven types of hybrid mutual funds available in India. Also known as balanced advantage funds, these schemes invest in equity and debt and manage the portfolio dynamically according to market conditions.

So, depending on the market outlook, a dynamic asset allocation mutual fund can have 0%-100% of the portfolio invested in equity-related securities to 0%-100% invested in debt-based securities. The fund manager actively manages the portfolio allocation to optimize returns on the investment.

How Do Dynamic Asset Allocation Mutual Funds Work?

Dynamic asset allocation funds are ideal for uncertain markets as they provide more flexibility to the fund managers for managing the scheme portfolio. For instance, if the market is in a prolonged downtrend, the investments can be shifted to debt-based assets to continue generating returns for the investors.

Similarly, if the market is in the accumulation or mark-up (uptrend) phase, fund managers can invest more in equity-related securities to generate potentially higher returns. These schemes have model-based triggers, based on which equity and debt allocations are dynamically managed.

While there are no restrictions on the fund’s asset allocation, most balanced advantage funds are equity-oriented.

What are the Benefits of Investing in Dynamic Asset Allocation Funds?

Here are some of the top benefits of investing in dynamic asset allocation funds-

• Dynamically Managed Portfolio

  As discussed above, the portfolio of these schemes is dynamically managed by the fund managers according to the market conditions. Investments are actively shifted between equity and debt to follow market momentum and optimize overall returns.
  
  If the equity valuations peak, fund managers reduce equity allocation and allocate more funds to debt-based securities. Conversely, when the valuations are favourable, they reduce debt allocation and increase equity allocation to potentially generate better returns.

• Less Risky Than Pure Equity Mutual Funds

  While pure equity schemes can deliver potentially higher returns when the market is in an uptrend, things change significantly in the markdown (downtrend) phase. But in pure equity schemes, investments continue to remain in equity-related securities irrespective of the market cycle.
  
  Dynamic asset allocation funds are less risky as the fund manager can switch between equity and debt according to the market cycles.

• Higher Return Potential than Debt Mutual Funds

  Asset allocation mutual funds can generate potentially higher returns than pure debt schemes that only invest in debt-based securities. As these funds can also invest in equity, they can be ideal for investors looking for returns higher than pure debt funds.
  
  They are also an ideal for diversifying the portfolio as a single scheme offers access to equity and debt markets.
  
  Also Read - What is a Debt Fund?

Some Disadvantages of Dynamic Asset Allocation Funds

To fully understand what is dynamic asset allocation fund, it is also vital to know its disadvantages. Take a look-

• Higher Transaction Costs

  In dynamic asset allocation funds, fund managers must buy and sell securities regularly. As a result, these schemes can have higher transaction costs which could reduce the returns they generate.

• Riskier Than Debt Funds

  As these schemes invest in a mix of equity and debt, they are potentially riskier than pure debt funds. Ensure you understand your risk profile before investing.

• Active Management

  Funds managers are required to actively track the markets, macro and micro-economic trends, and stock-specific news to effectively manage the portfolio of these schemes. Therefore, when investing, ensure you select a scheme with a fund manager with extensive experience managing such dynamic funds.

The Right Balance of Equity and Debt with Dynamic Asset Allocation Mutual Fund

Finding the right equity/debt allocation is a never-ending battle for most investors. And when the investment is finally made, investors have to extensively track the markets and adjust their portfolio accordingly. Needless to say, this is a complex and time-consuming task.

With a dynamic asset allocation fund, you can let professionals manage this challenging task. But while these schemes can help investors keep up with the market momentum, they are not risk-free. Investors should assess their risk appetite before investing.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.