Why include dynamic asset allocation funds in your portfolio?

Are you looking to spread your investment across multiple asset classes? Do you seek automatic diversification across equity and debt investments? To diversify your portfolio across stocks and fixed-income investments, you can invest in dynamic asset allocation funds, also called balanced advantage funds. It involves changing your asset allocation to increase exposure towards equity or debt depending on market conditions, thereby maximising returns with minimal risk. Should you diversify your portfolio with dynamic asset allocation funds?

What are dynamic asset allocation funds?

Dynamic asset allocation funds are hybrid mutual fund schemes. It dynamically shifts between equity and debt depending on the market conditions. 

Dynamic asset allocation funds do not have restrictions on their equity or debt allocation. For instance, dynamic asset allocation funds automatically sell equity and increase debt allocation during overvalued stock markets. Moreover, the fund purchases equities when stock markets are down and profits when markets rise after some time. 

Dynamic asset allocation funds can outperform most hybrid funds by adjusting equity exposure based on market conditions. However, many hybrid funds have a pre-decided ratio between equity and debt investments. 

Why diversify your portfolio with dynamic asset allocation funds?

Dynamic asset allocation funds protect your portfolio when stock markets are volatile. It increases debt exposure when stock markets are about to crash. If you have sizable exposure to dynamic allocation funds, your portfolio will not be hit heavily during a stock market downturn.  

During a market correction, dynamic asset allocation funds must fall less than Sensex and Nifty 50. Moreover, they have an allocation towards equity and must outperform debt investments over time. Studies have shown that most dynamic asset allocation funds have met these criteria over three to five years. 

You do not have to time the stock market if you invest in dynamic asset allocation funds. The fund automatically increases equity allocation when stock markets could rise. It helps you maximise profits compared to hybrid funds with a fixed allocation towards equity and debt. 

Moreover, the fund automatically sells equity investments during overvalued markets and focuses on debt securities. It protects your portfolio, and you don’t need to find the right time to invest in the stock market. 

Dynamic asset allocation funds take care of portfolio diversification. It means spreading your investment across asset classes to mitigate investment risk, and these funds perform the task with ease. Moreover, you don’t have to worry about rebalancing your portfolio. Dynamic asset allocation funds shift between equity and debt to maximise returns and protect the portfolio depending on market conditions. 

How to pick suitable dynamic asset allocation funds?

You must check the investment style before investing in dynamic asset allocation funds. For instance, some funds follow an approach of buying more equities during a stock market bull run and selling them at their peak. 

Many dynamic asset allocation funds follow the approach of selling equities when markets are overvalued and purchasing them when stock markets are about to rise. Risk-averse investors prefer this investment style. 

Some dynamic asset allocation funds maintain higher equity allocation irrespective of market conditions. You must pick funds that match your investment style. Moreover, it helps to check the fund’s expense ratio, which is the cost of managing the investment. You can choose a dynamic asset allocation fund with a lower expense ratio. 

You must check the credit quality of the debt securities in the dynamic asset allocation funds portfolio. It helps if you opt for funds with AAA-rated debt securities in the portfolio as it minimises the chances of a default on principal and interest repayments. 

Dynamic asset allocation funds automatically diversify your portfolio. It is suitable for first-time investors in stocks as the debt portion cushions your portfolio. Seasoned investors can increase their exposure to equity investments while simultaneously lowering the risk. In a nutshell, you can invest in dynamic asset allocation funds to avoid timing the stock market. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in

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