Dynamic Asset Allocation Fund: What it is, How it Works

If you have just entered the world of mutual funds(MF), you might come across different terms like dynamic asset allocation that can seem daunting at first. But fret not! These concepts are much easier to understand when broken down. So, let’s dig deeper and find out how these funds work and their purpose in an investment portfolio.

What are Dynamic Asset Allocation Funds?

If you are a first-time investor, you must know that the 2 key aspects of investing are – how to grow your capital and how to protect it. As you know, plenty of investment options are available in the market that cater to these requirements. All these investment tools come with different levels of risk and return potential.

Dynamic asset allocation is a portfolio management strategy that helps adjust the different asset classes according to the market conditions. Further, dynamic asset allocation funds (DAAF) are hybrid or balanced funds spread across various sectors. Most funds under this category are invested across different sectors like equity, stocks, real estate and bonds. So, if the market slows down due to recession, these funds are the recourse meant for all consumers despite the risk threshold.

The dynamic nature of these funds makes them suitable in an uncertain market because the investments are widely distributed.

Additional Read - 4 Ws of Balanced Advantage Funds

How Dynamic Asset Allocation Works

Dynamic asset allocation involves adjusting a portfolio based on changing market conditions. Fund managers reallocate assets frequently to respond to current market risks and take advantage of the shift to generate returns that exceed a targeted benchmark. 

The returns generated with dynamic asset allocation depend on the ability of the fund manager to make good investment decisions at the right time. 

Benefits of dynamic asset allocation funds

There are several advantages of investing in dynamic asset allocation mutual funds, such as:

• These funds can resist the bearish pull of a market during a recession. And since these funds are highly diversified, there are fewer chances of making a loss at the end of the tenure.
• These funds give you the benefit of investing in both high-risk equity markets and the relatively placid bond and real estate markets.
• A DAAF is suitable for all kinds of investors with different risk profiles, as it gives you a chance to invest in equities without too much risk. Hence, you can stay invested in equities during the ups and downs of the market.

Limitations of Dynamic Asset Allocation

1. Active Management

Dynamic asset allocation involves continuous monitoring and active decision-making to adjust the portfolio according to the market conditions. However, this requires time and resources. Fund managers also need to keep up-to-date with the market changes and their impact on various asset classes. 

2. Transaction Costs

Frequent buying and selling to adjust asset allocation can lead to higher transaction costs, which may reduce overall returns.  

Best dynamic asset allocation funds in the market

Here are some of the best-performing dynamic asset allocation funds in the market:

• ICICI Prudential Small Cap Fund
• Edelweiss Balanced Advantage Fund Direct-Growth
• Aditya Birla Sun Life Balanced Advantage Fund
• HDFC Balanced Advantage Fund
• Axis Dynamic Equity Fund

Additional Read - Should You Invest in Balanced Advantage Fund Now?

How to invest in a dynamic asset allocation fund?

To invest in a dynamic asset allocation fund, start by researching a few options with a solid track record and a strategy that fits your risk appetite. These funds automatically adjust between equity and debt based on market conditions (trends) , giving you a blend of growth and stability. Check their expense ratios and the fund manager’s approach. Once you've chosen one, make sure your KYC is done and invest through a mutual fund platform or directly on the fund’s site. Keep an eye on its performance, but remember, these funds are best for medium to long-term goals (3-5 years or more).

Should you invest in DAAF?

If you are looking for MFs that allow you to participate in the long-term growth potential of equities with much lower volatility, consider investing in DAAFs. These funds are not only tax-efficient but also cost-efficient asset allocation solutions. Therefore, these funds are suitable for you if you want to remain at an advantage despite the rising and falling of equity markets.

Still hesitant to take the first step of your investment journey? Fret not! Tata Capital’s investment app can make your job easier and is the perfect investment guide. You can choose the ideal funds based on your financial requirements, risk appetite and investment objectives. So, download the app today and put your money to work!

FAQs

Which is the best dynamic asset allocation fund in India?

The best dynamic asset allocation fund depends on the varying performance. Some of the best-performing dynamic asset allocation funds include ICICI Prudential Small Cap Fund, Aditya Birla Sun Life Balanced Advantage Fund, and HDFC Balanced Advantage Fund, which are known for their strong track records and consistent returns.

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

Dynamic asset allocation funds readjust the portfolio based on market conditions. In contrast, multi-asset funds invest in multiple asset classes like equity, debt, and commodities, offering broader diversification across various assets.

What are the 4 types of asset allocation?

The four types of asset allocation include strategic, tactical, dynamic, and core-satellite allocation. Each strategy varies in its approach to balancing risk and reward based on market conditions and investor goals.