Educate Yourself

Investing in Mutual Funds

Investing in Mutual Funds, the Dynamic Asset Allocation way

Dynamic asset allocation are funds that invest 0-100% of their portfolio in equity or debt based on the market environment. The fund manager will increase the exposure to equity when market valuations are attractive and will prune down the equity exposure by increasing cash or debt exposure or by hedging when the equity markets gets expensive.

    1. What is a dynamic asset allocation fund?

      Diversified equity mutual funds have a mandate to be fully invested at all times and not take any cash calls. However, dynamic asset allocation funds are allowed to invest in a mix of equity and debt. Depending on their view of the stock markets they increase or decrease their allocation to equities and debt. Usually, when valuations are high they reduce equity in the portfolio and when it is low they increase it. The portfolio can have up to 100% in equity depending on the fund houses method of calculation. A fund house can use its own method for calculating this. Nifty PE, price-to-book value or other in-house proprietary models developed by the fund house can be used.


    2. Why these funds are recommended to first-time equity investors?

      Mutual funds have become the gateway to stock market investing for a large number of investors. A lot of them especially those who are shifting some of their fixed deposit investments are not used to the volatile nature of stock markets. When there is a sharp correction, portfolios with a mix of equity and debt will face a lower volatility than a pure equity fund. The experience for these investors will be better than what they would get in a diversified equity fund.


    3. What is the advantage of a dynamic asset allocation fund?

      The fund is categorised as dynamic asset allocation because it allows the fund manager to rebalance the equity and debt portion of the portfolio. Thus, it is recommended for first time equity investors who have a low risk appetite. In the event of a corrective phase, these funds will most likely see a lower dip in the net asset value (NAV) because their allocation to equities is low. However, it is important to note that these funds tend to underperform vis-à-vis diversified equity mutual funds when equities surge because of their nature of holding higher debt in prolonged rallies.

    4. What are the impacts of tax on these funds?

      Dynamic asset allocation funds are managed in such a way that they are taxed as equity funds. The fund may increase or decrease its equity or debt portfolio, however, it ensures that the equity plus arbitrage component is at least 65% of the corpus. This helps it qualify for equity taxation. Investors should consult financial advisor before investing.

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