Dynamic Asset Allocation Funds are also known as Balanced Advantage Funds (BAFs). These represent a type of mutual fund where the fund manager adjusts the mix of stocks and bonds based on current market trends. As per SEBI regulations, these funds are required to invest in both debt and equity and dynamically switch allocations between them. For example, if stocks seem more promising, a manager might allocate 70-80% to them, whereas if investing in bonds looks more favourable, the allocation shifts accordingly.
This flexibility allows BAFs to aim for better returns while managing risk. By dynamically switching between stocks and bonds, these funds try to take advantage of market opportunities while simultaneously protecting against downturns. This way, BAFs can easily adapt to changing economic conditions.
If you are looking for a mutual fund that can adjust its portfolio according to the market conditions and offer you optimal returns with minimal risk, you may want to consider dynamic asset allocation funds. These funds are a type of hybrid funds that invest in a mix of equity and debt instruments and dynamically change their allocation based on predefined market indicators. In this article, we will explain what dynamic asset allocation funds are, how to invest in them, their benefits and drawbacks, and who should invest in them.
What are dynamic asset allocation funds?
Dynamic asset allocation funds are mutual funds that do not have any fixed allocation to equity or debt. Instead, they follow a rule-based model that determines the allocation based on the market valuation, sentiment, and momentum. For example, some funds use the price-to-earnings (PE) ratio of the Nifty 500 index as a market indicator. If the PE ratio is high, indicating that the market is overvalued, the fund will reduce its equity exposure and increase its debt exposure. Conversely, if the PE ratio is low, indicating that the market is undervalued, the fund will increase its equity exposure and reduce its debt exposure. This way, the fund can capture the upside potential of the equity market when it is rising and protect the downside risk when it is falling.
Purpose of dynamic asset allocation funds
The main purpose of dynamic asset allocation funds is to provide long-term capital appreciation with relatively lower volatility through a dynamically balanced portfolio of equity and debt funds. These funds aim to optimise the risk-return trade-off by adjusting the asset allocation according to the market conditions. These funds are suitable for investors who want to benefit from the growth potential of equities without taking too much risk.
Features of a dynamic asset allocation fund
Dynamic asset allocation funds have several key features that make them adaptable to changing market conditions. Also, these features help fund managers actively manage and optimise portfolios for better returns and risk management. Let’s check them out:
Management
These funds are actively managed, which means fund managers continuously monitor the market and make timely decisions to adjust the asset mix between stocks and bonds. Unlike passive funds that track a benchmark, dynamic funds rely on the expertise of the manager to manage market changes and seize opportunities.
Tactical allocation
Fund managers use tactical allocation to make short-term adjustments to the portfolio's asset composition. For example, if interest rates rise or a geopolitical event occurs, the manager might shift investments from stocks to bonds or vice versa. Usually, these shifts are made to capitalise on or protect against these changes.
Risk management emphasis
One of the main goals of these funds is to manage risk. During market downturns, the fund may reduce its exposure to riskier assets like stocks and increase holdings in safer assets like bonds. Meanwhile, the fund might increase its exposure to high-growth assets in favourable conditions to maximise returns.
Rebalancing
The fund managers of these funds practice rebalancing by periodically adjusting the mix of investments in a portfolio. This act ensures the asset composition stays aligned with the fund's overall strategy. For example, if the market changes and the value of stocks increases significantly, the fund may become too heavily weighted in stocks. To maintain the desired balance, the manager might sell some stocks and buy bonds or other assets.
Major advantages of dynamic asset allocation funds
Some of the major advantages of dynamic asset allocation funds are:
1. Diversification
These funds offer diversification across different asset classes, sectors, and market segments, which can reduce the overall portfolio risk and enhance the return potential.
2. Professional management
These funds are managed by experienced fund managers who use sophisticated models and algorithms to decide the optimal asset allocation based on the market indicators. This saves the investors from the hassle of timing the market and monitoring the portfolio performance.
3. Tax efficiency
These funds are usually tax-efficient as they maintain a gross equity exposure of more than 65%, which makes them eligible for equity taxation. This means that the long-term capital gains (LTCG) are taxed at 12.5% above Rs. 1.25 lakh in a financial year, and the short-term capital gains (STCG) are taxed at 20%.
Who should invest in a dynamic asset allocation fund?
Dynamic asset allocation funds are ideal for investors who:
- Have a high risk appetite and a long-term investment horizon
- Want to diversify their portfolio across different asset classes
- Want to benefit from the growth potential of equities without taking too much risk
- Do not have the time or expertise to manage their portfolio actively
- Want to enjoy the tax benefits of equity taxation
As mentioned earlier, dynamic asset allocation funds are usually taxed as equity funds, as they maintain a gross equity exposure of more than 65%. However, if the fund’s equity exposure falls below 65%, then the fund will be taxed as a debt fund. In that case, the LTCG will be taxed at 12.5% without indexation benefit if the holding period is more than two years, and the STCG will be added to the investor’s income and taxed at the applicable slab rate if the holding period is less than two years. The dividends will be taxed at the investor’s income tax slab rate in both cases.
Things to consider before investing in dynamic asset allocation funds
Before investing in dynamic asset allocation funds, you should consider the following factors:
- Fund performance: You should compare the past performance of different dynamic asset allocation funds and choose the one that has delivered consistent and stable returns over different market cycles. You should also check the fund’s risk-adjusted return measures, such as Sharpe ratio, Sortino ratio, and alpha, to evaluate the fund’s performance relative to its risk and benchmark.
- Fund strategy: You should understand the fund’s strategy and the market indicators that it uses to decide the asset allocation. You should also check the fund’s portfolio composition and turnover ratio to assess the fund’s quality and stability.
- Fund expenses: You should check the fund’s expense ratio, exit load, and other charges that may affect your net returns. You should opt for a fund that has a low expense ratio and no exit load.
- Fund suitability: You should assess your risk profile, investment objective, and time horizon before investing in a dynamic asset allocation fund. You should also consult your financial advisor if you have any doubts or queries regarding the fund’s suitability for your portfolio.
List of dynamic asset allocation mutual funds
- HDFC Balanced Advantage Fund
- Bajaj Finserv Balanced Advantage Fund
- SBI Balanced Advantage Fund
- ICICI Prudential Balanced Advantage Fund
- Quant Dynamic Asset Allocation Fund
- Tata Balanced Advantage Fund
- Edelweiss Balanced Advantage Fund
- Samco Dynamic Asset Allocation Fund
- UTI Balanced Advantage Fund
- Nippon India Balanced Advantage Fund
How to invest in dynamic asset allocation funds?
Investing in dynamic asset allocation funds is quite easy. You can follow these simple steps to complete your investment:
Step 1: Click on INVEST NOW. You will be redirected to the mutual funds listing page.
Step 2: Filter by scheme type, risk appetite, returns, etc. or choose from the top performing funds list.
Step 3: All the mutual funds of the particular category will be listed, along with the minimum investment amount, annualised return, and rating.
Step 4: Get started by entering your mobile number and sign in using the OTP.
Step 5: Verify your details using your PAN, date of birth. If your KYC is not complete, then you will have to upload your address proof and record a video.
Step 6: Enter your bank account details.
Step 7: Upload your signature and provide some additional details to continue.
Step 8: Choose and select the mutual fund that you want to invest in.
Step 9: Choose whether you want to invest as SIP or lumpsum and enter the investment amount. Click on ‘Invest Now’
Step 10: Select your payment mode i.e., net banking, UPI, NEFT/ RTGS.
Step 11: Once your payment is done, the investment will be complete.
Your investment will start reflecting in your portfolio within 2-3 working days.
Conclusion
If you have a long-term investment horizon and want to benefit from the growth potential of equities while attempting to limit the downside by dynamically managing the portfolio through investment in equity and debt, dynamic asset allocation funds may be right for you. However, before investing in these funds, you should consider their performance, strategy, expenses, and suitability for your portfolio.
