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What are Dynamic Asset Allocation Funds?
Dynamic asset allocation funds are a type of balanced funds or Hybrid Funds. Most of the funds in this category are invested and spread across various sectors including equity funds, real estate, stocks and bonds.
In case the market slows down in times of a recession or a bear economy, a dynamic asset allocation fund is the one recourse meant for all consumers regardless of their risk threshold. Each of these funds are managed by a professional manager who takes care to ensure that the quality of investments is not lowered.
Bearing in mind the fact that equity funds offer the highest returns, one must not forget that the associated risks are also relatively high too. In an economy which is witnessing a slump in recent months, many investors are wary of pouring in too much of their assets in just one MF. They can opt for the list of dynamic asset allocation fund to earn guaranteed returns.
Purpose of Dynamic Asset Allocation Funds
It is perhaps the best and most suited investment vessel in an uncertain market. As opposed to static allocation funds, the dynamic funding mechanism is a better option because the investments are widely spread out.
A dynamic asset allocation perspective means that whenever a competing investment vehicle is malfunctioning, the liquidity poured in is often shifted to another vessel which is performing better.
The built-in dynamic nature of these funds is their primary advantage. It is a mechanism to beat off the market slumps.
The balanced funding option is highly recommended for those who are looking for assured returns after the end of tenure. It is also a valuable asset to those who have limited funds to invest in multiple sectors. Above all, dynamic asset allocation Mutual Funds are preferred for their steady and recurring returns.
Three issues which these funds cover are –
- A diversification of all assets.
- A marked control over any prevailing market volatility.
- A sense of mastery in multiple investment channels.
Since most such funds are fundamentally Fund of Funds, they come with significant taxation liabilities. Ordinarily, most Mutual Funds are subject to LTCG taxes, as is dynamic asset allocation MFs. If the funds are indexed, there will be a flat rate of tax at 20%, and the purchase price will be subjected to inflation rates.
However, the capital gains are calculated only once every three years between the procurement of the fund and the taxation period. In case the fund is non-indexed, the taxation liability is slightly lower.
Major Advantages of Dynamic Asset Allocation Funds
There are several advantages to dynamic asset allocation Mutual Funds, viz. –
- A dynamic asset allocation fund is one of the few investment instruments which can resist the bearish pull of a market-facing some very real prospects of a recession. It is also extremely diversified, which makes the prospects of making a loss at the end of the tenure slightly low.
- It is an ideal vessel to become direct contributors to the Indian economy via investment opportunities. These funds have the advantage of investing not only in high-risk equity markets but also the relatively placid real estate and bond markets. This makes even reluctant investors place their bets on the economy.
- Taxation returns on such Mutual Funds are also quite relaxed. Since the investments are spread across several sectors, there is a chance of availing tax exemptions as and where applicable.
- Investing in balanced funds is also a way to diversify the investment portfolio. Managing such a portfolio is always easier when the fund is consolidated, as is the case of a balanced fund.
- Lastly, the returns on such a fund are generally more dependable and better realised than most comparable Mutual Funds, especially over longer periods.