Sign In

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 I n 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 percentage of investment in equity or debt.

What is Dynamic Asset Allocation Fund?

A dynamic asset allocation mutual fund can be considered as an “all-weather” mutual fund and investment vehicle. Essentially dynamic asset allocation mutual funds rebalance their own portfolio between equity and debt according to ongoing market conditions. The fund managers at dynamic asset allocation funds, also referred to as "balanced advantage funds”, have certain flexibilities. The key flexibility here is asset allocation. Dynamic asset allocation mutual funds can hold major portion of investment in Equity with decent amount of exposure towards debt which can act as cushion.

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 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 unfavourable.

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

Purpose of dynamic asset allocation funds

There are a few easy and straightforward purposes of dynamic asset allocation funds. They can benefit a wide variety of investors by being a part of their portfolio. The 3 key benefits of dynamic asset allocation mutual funds are:

1. Each dynamic asset allocation mutual fund offers expert mutual fund managers who are in touch with the market and read it in a systematic and professional way.
2. Outside of thinking about asset allocation correctly, often moving money around funds requires involvement and transactions. Such transactions are liable to capital gains tax. However, when you’re invested in a dynamic asset allocation mutual funds, as long as you stay invested, your money is re-allocated to assets without a tax requirement from you.
3. You can hedge your bets across market conditions through dynamic asset allocation mutual funds. This way, your fund manager allocates your money to debt when the equity market isn’t priced right and moves your money into equities when prices become more attractive, all while keeping their assets under management (AUM) hedged for the market conditions.

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 can provide you with a smoother sail across the investing universe by offerings returns that are risk-adjusted and can fight volatility.

3. Dynamic taxation -

In the case the allocation to equity is 65% and above, the fund qualifies as an equity-oriented fund, tax treatment will be similar to that of equity-oriented fund. In the case the allocation to equity is below 65%, the fund does not qualify as an equity-oriented fund, tax treatment will be similar to that of funds other than equity-oriented funds.

How to invest in dynamic asset allocation fund?

Investing in dynamic asset allocation mutual funds is a simple process and can be done online. However, before you invest in your pick for the most suitable or best dynamic asset allocation fund it is important to consider your own allocation to it in your portfolio.

Although a dynamic asset allocation fund is naturally primed to factor in market conditions, it is still best to invest your money through SIP as an additional layer of protection and rupee cost averaging for your capital.

Once you pick from dynamic asset allocation fund, you can invest in it online - whether through a broker, distributor, or directly with the asset management company (AMC) itself.

Conclusion

Dynamic asset allocation mutual funds are an investment instrument that balances equity and debt in its portfolio according to its strategy for varying market conditions. Also called a balanced advantage fund, it is a structurally hedged product with the freedom to invest in different asset classes as the fund manager deems appropriate for current market conditions.

Dynamic asset allocation funds can help your portfolio by balancing equity and debt in a single fund, without the burden of market monitoring, undertaking transactions, or capital gains tax on portfolio rebalancing. One of the best way to invest in a dynamic asset allocation fund can be to SIP.

FAQs

What is a dynamic asset allocation mutual fund?

A dynamic asset allocation mutual fund, also known as a Balanced Advantage fund, is a diversified mutual fund that invests across Equity & Debt. It is an inherently hedged instrument and allows an investor to have a lower risk profile and ensures a reduced degree of volatility compared to a full equity fund or a debt fund.

Under this category of funds, the asset manager has the discretion to decide how much to invest in each asset class depending on their strategy to tackle market conditions.

Is dynamic asset allocation fund debt or equity?

A dynamic asset allocation fund is defined by its flexibility of movement across asset classes. As such, it can invest in debt or equity and equity related securities, or even REIT’s or InvIT’s. Depending on the composition of how the assets under management are invested over the duration of your holding, or even during the period of your sale, shall differ and affect taxation accordingly.

How does a dynamic asset allocation fund compare to a multi asset fund?

By Securities and Exchange Board of India (SEBI) definition, a multi asset fund must hold at least 10% in each asset class - debt, equity, and gold. Allocating the remaining 70% is at the fund manager’s discretion in a multi asset fund.

However, a dynamic asset allocation fund does not have any such mandate or regulatory requirements. A fund manager has greater flexibility to allocate their assets under management (AUM) across Equity & Debt in appropriate proportion they see fit to tackle or benefit from market conditions.

While the returns on investment from both of these mutual fund categories varies from fund to fund and period to period, they are both inherently hedged and moderate solutions to prevent serious drawdowns from market volatility.

How do dynamic asset allocation mutual funds invest?

Dynamic asset allocation mutual funds invest their assets under management across different asset categories. Such funds are free to allocate the money they manage as they please across equities, and debt. It is critical to invest your money in a dynamic asset allocation fund after you are aware of and comfortable with its risk profile, historic returns, and its fund manager’s investment strategy.

A dynamic asset allocation mutual fund is unbound by regulations or mandates that require it to allocate money to any particular asset class. Hence, over time, a fund may enjoy different taxation benefits over periods of holding different asset classes. These may also include equity-related instruments or real estate in addition to the conventional asset categories - gold, debt, and equities.

​
​
Disclaimer:
This is an investor education and awareness initiative by Nippon India Mutual Fund.
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 This is an investor education and awareness initiative by Nippon India Mutual Fund.

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document. Language Disclaimer:
While utmost care has been taken in translating the article into respective regional language(s), in case of any confusion or difference of opinion, article available in English language should be deemed as final. The article provided herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional advice for the readers. The document has been prepared on the basis of publicly available data/ information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of loss of profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this article. "ABOVE ILLUSTRATIONS ARE ONLY FOR UNDERSTANDING, IT IS NOT DIRECTLY OR INDIRECTLY RELATED TO THE PERFORMANCE OF ANY SCHEME OF NIMF. 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."

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
  • CONNECT WITH US
Top