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Dynamic Asset Allocation funds – What is it, Benefits, Limitations, Taxation, Top Funds

  • Shruthika Priscilla
  • Jan 12 2022
  • 10 minutes
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There are many investors who do not want to invest solely in any one class of investments. Such investors wish to spread their portfolio to include many assets and thereby increase the value or the return to their portfolio. For such investors, dynamic asset allocation funds are a good bet. 

Given below are the meaning and a few other details of the dynamic asset allocation fund 

What are dynamic asset allocation funds?

Dynamic asset allocation fund belongs to the hybrid fund category. This fund invests in not just debt and equity but also real estate, derivatives, bonds, etc. This diversified portfolio helps in generating risk-adjusted returns where the fund manager is free to adjust the exposure to the underlying assets based on the current market trends. 

Fund managers use their in-house proprietary models to determine the rebalancing of the portfolio according to the market scenario to ensure that they are in line with the investment objective. This removes the chance of any bias on part of the fund manager and ensures that the rebalancing of the fund is done driven and backed by the data. These funds are actively managed funds where the decision-making ability of the fund managers plays a key role in the fund performance. 

Who can invest in dynamic asset allocation funds?

Dynamic asset allocation funds do not have a set or a fixed pattern of investments or proportion of debt-equity ratio to be maintained. This provides the fund manager with higher flexibility to invest across various asset classes and rebalance the fund from time to time. This limits the risk exposure of the fund and hence can be an excellent form of investment for the conservative investors who wish to limit the exposure in the mutual fund market yet earn stable and periodic returns over an extended period of time.

Ideally, every investor can have a dynamic asset allocation fund in their kitty. These funds provide the benefits of equity, debt, and other asset classes in a balanced form giving good growth over the long term at the same time reducing the risk of equity investments. 

What are the advantages of dynamic asset allocation funds?

There are several advantages of investment in dynamic asset allocation funds which are mentioned below.

Diversification

The biggest advantage of dynamic asset allocation funds is the diversified assets available in the fund. Investors can have the benefits of each asset class making them ideal for every class of investors.

Risk-adjusted returns

The returns of this fund are risk-adjusted which means the risk in the funds is managed effectively by the fund managers to ensure that they are not overexposed to any particular asset class. The returns generated are stable in both bullish and bearish markets. Also, the diversification of the fund can result in potentially higher returns than plain vanilla debt funds. 

The expertise of the fund managers

Fund managers play a key role in the performance of the fund. It is the fund manager’s expertise that helps in navigating the various ups and downs of the market cycles to ensure that the returns of the fund are not severely impacted and the risk on the fund also does not go too high so the fund does not lose focus of the investment objectives. Rebalancing decisions are based on fund manager expertise backed by thorough market research and analysis. 

What are the limitations of dynamic asset allocation funds?

Like any other investment, dynamic asset allocation funds also have their own set of limitations. These are discussed below.

Cost or expense ratio

The expense ratio and the cost of rebalancing the fund drive the overall expense of investment on the higher side making the returns cost-ineffective in certain cases.  

Fund manager reliance

The fund relies on the constant rebalancing of the exposure to the underlying assets to mitigate the risks. This requires the acute expertise of the fund manager and increases the fund’s reliance on their decision-making ability to ensure that the investor’s interest is protected.

Taxation 

The taxation of the dynamic asset allocation funds is quite complex as it has investments in different asset classes. This makes taxation of the funds a difficult task for the fund managers. 

What are the important things to consider while investing in dynamic asset allocation funds?

Investment in any asset has to be made after considering all the relevant factors involved to ensure that the investors are not in for a rude shock and the investment is in line with their expectations. Some of such factors to be considered are mentioned below.

Returns expectations

The returns of dynamic asset allocation funds are usually higher than regular debt funds as they are also backed by the equity portion of the fund. However, the investors have to be aware that the returns are not as high as that of equity funds or equity-oriented funds. Having correct returns expectations will ensure that the investors do not over assume the returns potential of the fund. 

Risk assessment 

The risk of dynamic asset allocation funds like any other fund cannot be ignored while making an investment decision. The risks are low to medium on account of the fund being more or less balanced between equity debt and other asset classes. 

Period of investment

The ideal period of investment in dynamic asset allocation funds is a minimum of approximately 3 to 5 years. This is the minimum duration required by the fund to go through the market cycles to be able to generate good returns for the investors.  

Cost of investment  

The cost of investment is another important consideration while making an investment decision. If the cost or the expense ratio of the fund is too high that it effectively negates the returns earned then the investment is no longer attractive. Hence, it is important to consider the overall cost of investment before making the investment decision.   

How are dynamic asset allocation funds taxed?

The taxation of dynamic asset allocation funds is quite complex. It often discourages the investors from making an investment in the fund. The returns from the dynamic asset allocation fund can be in the form of dividends and capital gains. Dividends from the fund are added to the taxable income of the investor and taxed at the applicable slab rates. Capital gains on the other hand are calculated based on the period of holding and the dominant asset class whether equity or debt.

When the fund has more the 65% of the asset allocation towards equity, the fund will be taxed as per equity funds and in other cases when the debt exposure is more, they will be taxed in line with the taxation on debt funds. 

The details of the same are mentioned below.

Type of fundsShort term gainsTax rateLong term gainsTax rate
Equity-oriented mutual fundsLess than 12 months15% (plus cess and surcharge)12 months and moreExempt up to Rs.1,00,000Above Rs.1,00,000 taxed at 10% (plus cess and surcharge)
Debt-oriented mutual fundsLess than 36 monthsSlab rate of investor36 months and more20% (plus cess and surcharge)

Top dynamic asset allocation funds

Some of the top funds in this category are mentioned below.

Edelweiss Balanced Advantage Fund

This is an open-ended fund launched in 2009 from the fund house of Edelweiss Mutual Funds. The basic details of the fund are given below.

ParticularsDetails
Fund managerBharat LahotiRahul DedhiaBhavesh Jain
Launch date1st January 2013
Minimum SIP investmentRs. 1,000
Expense ratio0.46%
RiskVery high

The returns provided by the fund as of 5th September 2021 are tabled below

Period1 yr3 yrs5 yrsSince launch
Returns20.45%17.76%16.28%13.32%

ICICI Prudential Balanced Advantage Fund

This fund was launched in the year 2013 from the fund house of ICICI Prudential Mutual funds. The fund follows CRISIL Hybrid 50+50 Moderate Index as its benchmark. The basic details of the fund are mentioned below

ParticularsDetails
Fund managerIhab DalwaiManish BanthiaRitesh Lunawat
Launch date1st January 2013
Minimum SIP investmentRs. 1,000
Expense ratio0.99%
RiskHigh

The returns provided by the fund as of 5th September 2021 are tabled below

Period1 yr3 yrs5 yrsSince launch
Returns15.96%13.08%12.83%13.32%

L&T Balanced Advantage Fund

This is an open-ended moderate risk fund launched in 2013 by L& T Mutual Funds. The basic details of the fund are mentioned below.

ParticularsDetails
Fund managerVihang NaikJalpan ShahPraveen Ayathan
Launch date1st January 2013
Minimum SIP investmentRs. 1,000
Expense ratio0.69%
RiskModerately high

The returns provided by the fund as of 5th September 2021 are tabled below

Period1 yr3 yrs5 yrsSince launch
Returns9.71%11.03%10.18%12.25%

Aditya Birla Sun Life Balanced Advantage Fund

The scheme aims to offer long term capital growth and regular income with relatively lower volatility. It primarily invests in equity & equity-linked investments and fixed-income securities to maintain a dynamically balanced portfolio.

ParticularsDetails
Fund managerMohit SharmaLovelish SolankiVineet Maloo
Launch date1st January 2013
Minimum SIP investmentRs. 1,000
Expense ratio0.58%
RiskHigh

The returns provided by the fund as of 5th September 2021 are tabled below

Period1 yr3 yrs5 yrsSince launch
Returns14.97%13.38%11.86%12.44%

Conclusion

Dynamic asset allocation funds are a healthy mix of different asset classes. This fund is ideal for all categories of investors especially if they are conservative and want to earn potentially high returns at limited risk exposure. The heavy reliance on fund manager’s expertise can be usually detrimental to the interest of the investors but in the case of these funds, it is backed by in-house algorithms and models that help in making sound decisions without any bias. 

FAQs

What is the risk parameter of dynamic asset allocation funds?

The risk of dynamic asset allocation funds is lower than pure equity funds but higher than regular debt funds.

Is investment in dynamic asset allocation funds favorable in bearish markets?

 Dynamic asset allocation funds mitigate risks of the various asset classes by rebalancing them as per the current market trends. Hence they are a safe bet in both bullish and bearish markets.

What is the minimum exemption in capital gains allowed in dynamic asset allocation funds?

Investors get an exemption up to Rs. 1,00,000 in case of long-term capital gains if the dominant asset class of the dynamic asset allocation funds is equities (i.e, more than 65% of the fund).

 Are dynamic asset allocation funds classified as actively managed funds or passively managed funds?

Dynamic asset allocation funds are classified as actively managed funds.

 How to invest in dynamic asset allocation funds through Finity?

The investment process for investing in dynamic asset allocation funds through Finity is quite simple and is detailed below.
-Download the Finity App from the google play store
-The next step is to login using the valid login credentials 
-Select the ‘Hybrid funds’ category from the home page.
-The next step is to select ‘Dynamic Hybrid’ displayed on the next page
-Investors will be given a list of funds under this category. They can click on the fund to get the relevant details -before making the investment decision. 
-Following this investors will have to select ‘Invest’ which will take them to a new page
-Here they will be required to select the mode of investment (lumpsum or SIP) and the amount to be invested.
-The said amount has to be paid through any of the available payment modes and the fund will be reflected in the portfolio tab of the investor.

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