Why Invest In Dynamic Asset Allocation Funds?

The current government formation in Maharashtra showcases the inability to make a decision. The political parties are grappling with how to form a government. There are many permutations and combinations. These are not far from the dilemmas that the investor faces whilst investing. Which asset class is going to perform well in the next 1 year, 3 years or longer. Will the equity market continue to rise? Is the credit squeeze nearly over? Is it the right time to invest in fixed income schemes? Apart from these questions, there are many factors that impact our investment decision making like our ability to take risk, willingness to take risk, availability of capital, time period of investment, etc. In such circumstances asset allocation funds can come to your rescue. 

What are dynamic asset allocation funds?

Dynamic asset allocation funds are designed to adjust the equity-debt allocation based on a formula like PE ratio, PB ratio or other such matrices and are accordingly rebalanced monthly. When valuations are low, these funds increase equity allocation in the portfolio, and when valuation parameters are high, they reduce allocation to equities. The equity component of the portfolio can vary between 0% and 100% depending on the method of calculation used by the fund house. The fund house is free to use its own methodology for calculation. A fund could use the Nifty PE, price-to-book value or any other in-house developed proprietary model to determine the proportion of funds to be deployed to equity while the balance is invested in fixed income.  

What are the benefits of dynamic asset allocation? 

Many investors are entering equities through mutual funds for the first time. These investors are largely not used to the volatility of the equity markets. During sharp corrections, a portfolio with a mix of debt and equity would face lower volatility than a pure equity fund portfolio. One of the key advantages of dynamic asset allocation funds is that they manage risk very well by spreading investments across asset classes. 

One of the reasons why investors are not able to make more money in the market, is due to their inability to exit/enter the market at the right time. These funds are able to manage this aspect of investing very well. Dynamic asset allocation funds keep emotions out of investing. Basis the underlying algorithm the fund allocates to equity and debt. Consequently, these funds are able to harness the benefits of both equity as well as debt investments.