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Financial Term of the week- Dynamic Asset Allocation Funds

While wealth creation may be one of your goals as an investor, another goal in your list would probably also be that of wealth protection. The balance between creation and protection can be achieved by adopting the right asset allocation strategy in your portfolio. Asset allocation is the process of allocating your money to different asset classes according to your financial goals, risk appetite, and investment horizons. The different types of asset classes can be equity, debt, gold, real-estate and so on; and each of these has a varying degree of risk associated with it.

Also, asset allocation can be a continuous process. As the markets move up and down, your asset allocation may change or may need to change in order to create wealth, but at the same time, you may or may not have the market expertise to protect your wealth parallelly. A dynamic asset allocation fund is an all-weather fund that rebalances its own portfolio between equity and debt based on the prevailing market condition. The fund manager of a dynamic asset allocation or a balanced advantage fund has the flexibility to vary the fund’s investment in equity or debt anywhere in the range of 0-100%.

How Does A Dynamic Asset Allocation Fund Work?

A lot of investors tend to buy when the market is high/more expensive and sell when it’s low. However, this is not the correct model of investing to follow. You should buy when the market is low and vice versa. Dynamic asset allocation fund encourages a dynamic allocation of capital, in equity or debt asset class, to investors. For example, when the market is low, the fund may maintain a higher equity allocation & shift higher allocation to debt category when the markets are high.

As evident, this requires a constant involvement and monitoring of markets on the part of the fund manager.

A dynamic asset allocation fund takes the pressure off you to choose the right assets and move in tandem with the market with the aim to provide relatively better returns

Who Should Invest In A Dynamic Asset Allocation Fund?

A risk-averse investor, someone who is foraying into equity investment for the first time or an investor who is investing in mutual funds for the first time, can be the ideal suitors for this fund. A possible investor can also be one who wants to ride the market tide but does not have the skill or time to research the ways to do the same.

Advantages Of Dynamic Asset Allocation Fund

  1. No additional costs- If you were to allocate asset manually, you might find it expensive to exit certain schemes while rebalancing your portfolio owing to exit loads and capital gains tax. However, dynamic asset allocation funds do this for you without the need for expertise or any additional costs.
  2. Risk-adjusted returns- This fund provides you with a smoother sail across the investing universe by offerings returns that are risk-adjusted and can fight volatility.
  3. Dynamic taxation- As per the SEBI guidelines, any fund with an equity + arbitrage allocation of 65% or above will be taxed as an equity fund, while the remaining will be taxed as something other than equity funds. The returns from a dynamic asset allocation fund can be taxed either way depending on the asset allocation.

THE VIEWS EXPRESSED HEREIN CONSTITUTE ONLY THE OPINIONS AND DO NOT CONSTITUTE ANY GUIDELINES OR RECOMMENDATION ON ANY COURSE OF ACTION TO BE FOLLOWED BY THE READER. THIS INFORMATION IS MEANT FOR GENERAL READING PURPOSES ONLY AND IS NOT MEANT TO SERVE AS A PROFESSIONAL GUIDE FOR THE READERS.


Disclaimer:
Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/InvestorEducation/what-to-know-when-investing.htm This is an investor education and awareness initiative by Nippon India Mutual Fund.
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