With increasingly busy lifestyles corresponding with higher disposable incomes, professionals are turning to mutual funds more often for their investing needs. As markets remain volatile, fund managers are innovating with new investing styles that enable a mix of both equity and debt to maintain a balance between growth (provided by equity) and safety (provided by debt). This originally resulted in the emergence of balanced funds that focused on both. In the year 2015-16, balanced funds received an inflow of more than Rs 19,000 crore.

Need for a flexible investment portfolio

Dynamic Asset Allocation funds are useful to investors across the spectrum looking for funds that provide good value without too much risk.

Dynamic Asset Allocation funds are useful to investors across the spectrum looking for funds that provide good value without too much risk. | Picture Courtesy: Visual Hunt

Dynamic Asset Allocation Funds differ by enabling a rapid shift from debt to equity and vice versa depending on market conditions.

Dynamic Asset Allocation Funds are an evolution of balanced funds. They differ by enabling a rapid shift from debt to equity and vice versa depending on market conditions. The flexibility provided by the fund structure enables fund managers to sync with the market’s conditions and move rapidly to either shift the portfolio to safety using debt instruments, or to move to equity when the market is at a lower point.

The structure of the fund makes it useful to investors across the spectrum that are looking for funds that provide good value without exposing themselves to too much risk. This is corroborated by a study done by The Economic Times that indicated that in terms of volatility of returns, dynamic asset allocation funds performed better than balanced funds by showing a lower standard deviation of returns over a period of time.

Research by the research firm Value Research also indicated that Dynamic Asset Allocation funds outperformed Large Cap funds over 1 year, 3 year and 5 year periods, delivering an average 3 year CAGR of 13.39%.

One of the key benefits of these funds are the tax benefits that accrue at the year end, thereby increasing potential returns. Some funds offer interesting features that can be useful to individuals that want to balance their monthly inflow and outflows. For instance, ICICI Prudential’s Balanced Advantage Fund aims to provide two features that can help with cash flow – it aims to provide a month on month tax free dividend and it allows a monthly withdrawal from the scheme through a feature known as the ‘Automatic Withdrawal Plan’.

Dynamic asset allocation model aims to remove that stress from investors by employing the ability to have an automatically balanced portfolio.

The most interesting aspect of these funds is the ability to have an automatically balanced portfolio. Generally, investors are required to invest in a variety of different asset classes or even different mutual funds to attain a balanced portfolio. However, the dynamic asset allocation model aims to remove that stress from investors. Many funds, including ICICI Prudential Mutual Fund have developed in-house models that help them buy low and sell high.

At the end of the day, investing is a long term game. Dynamic asset allocation funds can potentially help you beat the broader market indices over the long term, with a lower risk due to the debt component, and without the headache of having to manually keep rebalancing your portfolio.

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


Featured image source: Pixabay

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Posted by The Indian Economist