Is It Good To Invest In A Dynamic Asset Allocation Fund for the long term

A long-term investment strategy should balance growth potential with risk management. Hybrid funds such as dynamic asset allocation funds aim for this balance by investing in a flexible portfolio of both debt and equity instruments. Such funds may suit investors looking for long-term growth potential along with mitigation of market volatility risks.

This article explores the investment strategy of dynamic asset allocation funds, their advantages and some considerations for a potential investor.

• Table of contents

1. Understanding dynamic asset allocation funds
2. Dynamic asset allocation funds for long-term
3. Benefits of dynamic asset allocation funds for long-term investors
4. Considerations for long-term investors
5. Bajaj Finserv Balanced Advantage Fund
6. Why should you invest in a dynamic asset allocation mutual fund?
7. Who should invest in a dynamic asset allocation fund?
8. Taxation rules of dynamic asset allocation mutual funds
9. How to invest in dynamic asset allocation funds?

Understanding dynamic asset allocation funds

Dynamic asset allocation funds, also called balanced advantage funds, are actively managed investment vehicles that can dynamically adjust their asset allocation between equity and debt instruments in response to changing market conditions, economic indicators, valuation metrics and other analyses.

Unlike traditional mutual funds with set allocation patterns, dynamic asset allocation funds have more flexibility in asset allocation, enabling them to potentially capitalise on market opportunities and mitigate downside risks. For instance, during periods of economic expansion, the fund may increase exposure to equities for potential capital appreciation. On the other hand, during increased volatility, the fund may reduce equity exposure and increase allocations to defensive assets like bonds or cash with an aim to mitigate impact on invested capital.

The portfolio may include equities, fixed-income securities, and cash equivalents.

Dynamic asset allocation funds for long-term

While funds that invest predominantly in equity may have higher growth potential in the long term, dynamic asset allocation funds could offer a balance of risk and returns. So, for a conservative or moderate-risk investor, such a fund may be a good fit as a long-term investment option. However, an aggressive investor willing to take high risks may find an equity fund more attractive and suitable.

Benefits of dynamic asset allocation funds for long-term investors

• Exposure to different market cycles: Dynamic asset allocation funds have the flexibility to adapt to changing market conditions, enabling them to potentially capitalise on opportunities and navigate turbulent market environments more effectively. In the long term, such funds can potentially tap into opportunities offered by different market cycles and trends.
• Active management: With skilled fund managers actively making tactical asset allocation decisions, dynamic asset allocation funds have the potential to outperform passive investment strategies, particularly during periods of market volatility or economic uncertainty.
• Investment experience: By dynamically adjusting asset allocations based on prevailing market conditions, dynamic asset allocation funds aim to manage downside risk and minimise portfolio volatility, potentially providing long-term investors with a smoother investment experience.

Considerations for long-term investors

• Costs: Active management strategies typically involve more expenses and thus higher fees than passive investment strategies, which need to be factored in while estimating the net returns.
• No performance guarantee: While dynamic asset allocation funds aim to outperform their benchmarks over the long term, there is no guarantee of success, and past performance does not indicate future results.
• Risk: Although these funds seek to manage risk through tactical asset allocation, they still carry inherent market risk, and investors should be prepared for fluctuations in portfolio value.

Bajaj Finserv Balanced Advantage Fund

The Bajaj Finserv Balanced Advantage Fund offers both direct and regular plans. Lumpsum and SIP investment options start from Rs. 500.

Why should you invest in a dynamic asset allocation mutual fund?

Dynamic asset allocation funds adjust their equity and debt exposure based on market conditions. They may be suitable for investors seeking a structured approach to asset allocation. Here are some key reasons to consider them:

Professional portfolio management: Experienced fund managers actively manage the asset mix between equity and debt, responding to market conditions. This may be beneficial for investors who do not have the expertise or time to adjust their portfolio allocation themselves.

Potential for risk management: These funds may reduce exposure to equity when markets are volatile or valuations are high, shifting towards debt to potentially manage downside risk. When valuations appear favorable, they may increase equity allocation to capture potential growth.

Facilitates disciplined investment: By following a structured rebalancing approach, dynamic asset allocation funds help investors avoid emotional decision-making, such as panic selling during downturns or excessive optimism during market rallies.

Convenience: By offering exposure to both equity and debt within a single fund, dynamic asset allocation funds simplify investment management, reducing the need to manage multiple funds separately.

Who should invest in a dynamic asset allocation fund?

Dynamic asset allocation funds, or balanced advantage funds, may be suitable for certain investors but not for everyone. Here’s a breakdown of who might benefit from them and who might not.

High-risk investors: These funds have equity exposure, making them subject to market fluctuations. However, their ability to shift towards debt during volatility can mitigate risk compared to pure equity funds.

Investors seeking professional management: Fund managers actively adjust asset allocation based on market conditions. This may be beneficial for those who lack the time or expertise to manage their portfolio.

Investors who understand the strategy: Each fund follows a different dynamic allocation model. Investors should be comfortable with the fund’s approach before investing.

Long-term investors: These funds remain exposed to market fluctuations. A long-term horizon can allow their strategy to play out effectively.

Investors seeking a balance between growth and risk management: By combining equity and debt, these funds aim to provide potential growth while managing downside risk. They may appeal to investors looking for a middle ground between pure equity and pure debt investments.

Taxation rules of dynamic asset allocation mutual funds

Dynamic asset allocation funds shift between equity and debt based on market conditions and the taxation structure depends on the equity-debt mix of the portfolio.

1. If it is equity-oriented (equity > 65%):

Short-term capital gains (STCG): Gains from units sold within one year are taxed at 20%.

Long-term capital gains (LTCG): Gains from units sold after one year are tax-free up to Rs 1.25 lakh. Gains above Rs 1.25 lakh are taxed at 12.5%.

2. If it is debt-oriented (>65% debt instruments:

Gains are added to income and taxed as per the investor’s income tax slab, regardless of the holding period.

3. If equity component is more than 35% but less than 65%:

STCG is levied on units held for less than 24 months. The tax rate is as per the investor’s income tax slab

LTCG is levied on units held for more than 24 months. The tax rate is 12.5%, with no indexation benefits and no exemption.

How to invest in dynamic asset allocation funds?

Here are the steps to follow to invest in a dynamic asset allocation fund:

1. Research and select a fund: Evaluate funds based on expense ratio, fund manager’s track record, and allocation strategy. Ensure you comprehend how asset allocation decisions are made, as different funds follow distinct methodologies.

2. Choose an investment platform: Purchase units directly from the fund house via its website or branch office. You can also invest through an aggregator or registered mutual fund distributor.

3. Complete KYC: Investors must be KYC-validated before investing.

4. Make your investment: Choose between a one-time lumpsum investment or a Systematic Investment Plan (SIP) with fixed periodic contributions. Ensure your investment meets the fund’s minimum required amount.

Conclusion

Dynamic asset allocation funds offer long-term investors a strategic approach to portfolio management, combining flexibility, active management, and risk mitigation strategies to pursue sustained growth potential while managing downside risk. However, the expense ratio for these funds may be higher than that of passive funds and they are not immune to market risks. As with any investment decision, investors should conduct thorough research, assess their financial goals and risk tolerance, and seek guidance from qualified financial advisors to make informed investment choices tailored to their circumstances.

FAQs:

Where do dynamic asset allocation funds invest?

Dynamic asset allocation funds invest in a diversified portfolio of assets, which could include equities, fixed-income securities, and cash equivalents. The fund manager dynamically adjusts the allocation of these assets based on market conditions, economic outlook, and other factors to optimise the return potential and manage risk.

Who should invest in dynamic asset allocation funds?

Dynamic asset allocation funds are suitable for investors seeking a balanced approach to long-term growth with the flexibility to adapt to changing market conditions. Moderately risk-tolerant individuals with a long-term investment horizon, goal-oriented investors, and those who value active management and diversification may find dynamic asset allocation funds suitable.

What kind of returns can investors get from dynamic asset allocation funds?

Returns from dynamic asset allocation funds vary based on market conditions, fund strategy, and the skill of the fund manager. The funds aim to deliver competitive risk-adjusted returns over the long term by dynamically adjusting asset allocations. However, actual returns fluctuate and past performance does not guarantee future results.

Which is better - a multi-asset or dynamic asset allocation fund?

Neither is inherently better; the suitability of a fund depends on individual risk tolerance and investment objectives. Multi asset allocation funds invest in equity, debt and at least one more asset class, such as gold. Dynamic funds typically invest in just equity and debt. The former may help mitigate risk and optimise return potential in some market conditions.

How do dynamic asset allocation funds work?

Dynamic asset allocation funds, also known as balanced advantage funds, modify their allocation between equity, debt, and other assets based on fund manager’s market outlook. They may aim to increase equity exposure when markets appear undervalued and shift towards debt when markets are falling. This strategy seeks to take advantage of market trends while managing risk.

What is the taxability on dynamic asset allocation funds?

The taxation of dynamic asset allocation funds depends on their asset composition at the time of redemption. If the equity allocation exceeds 65%, the fund is taxed as an equity fund. If equity exposure is below 65%, it is taxed as a debt fund. Capital gains taxation is determined by the holding period.

What is the difference between dynamic asset allocation fund and multi asset fund?

A multi-asset fund invests across at least three asset classes (such as equity, debt, and gold). In contrast, a dynamic asset allocation fund is required to invest only in two asset classes – equity and debt.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This document should not be treated as an endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purposes only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals, and horizon. This information is subject to change without any prior notice.