What is Dynamic Asset Allocation Fund (Balanced Advantage Mutual Fund)?
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What are Dynamic Asset Allocation Mutual Funds?
Dynamic asset allocation mutual funds are a type of hybrid funds that invest across multiple asset classes such as equity, debt securities, real estate, etc. They strike a balance between risk and return by balancing the portfolio. Hence there are also called balanced advantage funds.
When the valuations are high, they reduce their equity exposure and increase the allocation to other asset classes, such as debt, to reduce the risk. In contrast, when the valuations are low, they invest more in equities to increase the return.
These funds are professionally managed by experienced fund managers who make asset allocation decisions based on quantitative and qualitative analysis, not emotional bias. Since these funds are dynamically balanced, there is no target asset allocation, giving the fund managers the flexibility to rebalance the portfolio.
Dynamic asset allocation funds best suit investors with long-term goals and have a medium to low-risk appetite. Although the success of these funds, like any other mutual fund, depends on the market conditions, it also depends on the fund manager’s ability.
Purpose of Dynamic Asset Allocation Funds
Balanced advantage funds are one of the best investment alternatives when markets are uncertain. Since there is no static asset allocation target, the flexibility of choosing the asset allocation based on the market conditions makes them suitable for all kinds of market conditions.
If you want to dodge the effect of market slumps on your portfolio, dynamic asset allocation funds are your go-to funds. With minimum investment, you can get access to various asset classes, which will help you easily diversify your portfolio.
Who Should Invest in Dynamic Asset Allocation Funds?
Dynamic asset allocation funds are hybrid funds that invest in equity and debt instruments. Their asset allocation varies based on market conditions, and hence they manage risk very well. Investors with moderate to conservative risk tolerance levels can consider investing in them.
Since these funds have exposure to equity, investors with long-term goals can also consider investing in them. Moreover, investors looking for diversification can also invest in them as they invest in multiple asset classes.
Advantages of Dynamic Asset Allocation Funds
- Low risk: Dynamic asset allocation funds can resist bearish market conditions as they invest in multiple asset classes. Since their exposure to equity is lower than pure equity funds, the fall in the returns isn’t drastic making them suitable for low-risk investors.
- Diversification: These funds invest in multiple asset classes, making them ideal for retail investors looking for a diversified portfolio. With a low minimum investment, these funds can give exposure to equity and debt.
- Stable returns: Even though they invest in equity, balanced advantage funds give more dependable returns than other mutual fund categories. With low risk, investors can expect predictable returns.
- Flexibility to fund managers: The fund managers have the flexibility to decide on the asset allocation and aren’t restricted by a statutory limit which is the case for most mutual funds. This flexibility allows them to make quick and profitable decisions.
- No fund manager bias: Although the fund manager has the flexibility to decide the asset allocation, these funds are not subject to any kind of bias. This is because their decision is purely based on market movements.
- Invest any time: The primary advantage of mutual funds is that the hassle of timing the market is eliminated. However, in the case of pure equity funds, some investors do think twice before investing in the case of a bearish market phase. In the case of dynamic asset allocation funds, you don’t have to think twice before investing in any market condition, as they are designed to fight volatility.
Challenges of Dynamic Asset Allocation Funds
- High costs: Since the portfolio is frequently rebalanced based on market conditions, the transaction costs for these funds are slightly higher than others. This affects the profits of the fund as expenses are deducted before publishing the fund’s net asset value (NAV).
- Fund manager’s performance: The success of the funds depends on the fund manager’s expertise. These funds require a lot of research and active management, which is time taking. Hence the fund manager’s expertise is an important parameter to check when selecting these funds.
- Complex taxation: Since they invest in equity and debt securities and the allocation keeps changing, the way they are taxed also changes. The changing tax structure creates a lot of confusion for investors when they redeem their funds.
How are Dynamic Asset Allocation Funds Taxed?
The capital gains from dynamic asset allocation funds are taxable. However, the tax rate depends on the exposure to equity and debt. Funds with 65% exposure to equity are considered equity funds for the purpose of taxation. Else, they are treated as debt funds.
Taxation for Equity Funds
STCG (Short Term Capital Gains) is charged at 20% for funds withdrawn within one year of holding the fund in the portfolio.
LTCG (Long Term Capital Gains) is charged at 12.5% for funds withdrawn after 2 years of holding the fund in the portfolio.
Taxation for Debt Funds
STCG (Short Term Capital Gains) is charged at 20% for funds withdrawn within one year of holding the fund in the portfolio.
LTCG (Long Term Capital Gains) is charged at 12.5% for funds withdrawn after 3 years of holding the fund in the portfolio.
Best Dynamic Asset Allocation funds as per 2 year returns
| Scheme Name | Plan | AuM (Cr) | 1 Week | 1 Month | 3 Months | 6 Months | YTD | 1 Year | 2 Years | 3 Years | 5 Years | 10 Years |
| HDFC Balanced Advantage Fund – Direct Plan – Growth | Direct Plan | 94,048.24 | -1% | 2% | 7% | 12% | 19% | 36% | 29% | 25% | 23% | 16% |
| NJ Balanced Advantage Fund – Direct Plan – Growth | Direct Plan | 4,184.63 | -1% | 5% | 11% | 13% | 19% | 33% | 23% | – | – | – |
| Motilal Oswal Balance Advantage Fund – Direct Plan – Growth | Direct Plan | 1,270.57 | 1% | 8% | 17% | 21% | 23% | 25% | 23% | 15% | 15% | – |
| Mahindra Manulife Balanced Advantage Fund – Direct Plan – Growth | Direct Plan | 858.67 | -1% | 4% | 8% | 10% | 17% | 27% | 21% | – | – | – |
| Franklin India Balanced Advantage Fund – Direct Plan – Growth | Direct Plan | 2,171.08 | -1% | 2% | 6% | 10% | 16% | 25% | 20% | – | – | – |
| Baroda BNP Paribas Balanced Advantage Fund – Direct – Growth | Direct Plan | 4,065.56 | -1% | 3% | 7% | 11% | 16% | 26% | 20% | 15% | 19% | – |
| SBI Balanced Advantage Fund – Direct Plan – Growth | Direct Plan | 32,144.90 | 0% | 2% | 6% | 10% | 16% | 24% | 20% | 15% | – | – |
| Axis Balanced Advantage Fund – Direct Plan – Growth | Direct Plan | 2,466.12 | 0% | 4% | 9% | 14% | 19% | 30% | 20% | 14% | 15% | – |
| Invesco India Balanced Advantage Fund – Direct Plan – Growth | Direct Plan | 803.42 | 0% | 3% | 8% | 12% | 16% | 28% | 20% | 14% | 15% | 12% |
| Edelweiss Balanced Advantage Fund – Direct Plan – Growth | Direct Plan | 12,117.03 | -1% | 4% | 7% | 12% | 17% | 27% | 19% | 14% | 18% | 13% |
Updated as of 9th September, 2024
Frequently Asked Questions
How to Invest in Dynamic Asset Allocation funds?
You can invest in dynamic asset allocation funds online or offline. For offline, you can submit an application form to the asset management company’s office. Alternatively, you can invest in them online through any platform offering mutual funds, such as Jupiter Money. However, it is important to carry out proper due diligence before investing. Check and analyse the funds using quantitative and qualitative factors and invest in the fund that best suits your goals.
How long should I stay invested in dynamic asset allocation mutual funds?
Dynamic asset allocation funds are best suited for long-term goals. Since they have exposure to equity, it is best if you stay invested for a minimum of three years in these funds.
Where do dynamic asset allocation mutual funds invest?
Dynamic asset allocation funds invest in multiple asset classes, including equity and debt. They adjust the exposure to each asset class based on market conditions. For example, if the price-to-earnings multiple (PE ratio) is high, then they will reduce their equity exposure and increase debt exposure. Alternatively, if the valuations are low, they will increase their equity exposure.
What kind of returns can I earn from dynamic asset allocation?
Since these funds invest in equity and debt securities, they give slightly higher returns than pure debt funds but a little lower than pure equity funds. On average, you can expect around 12-16% returns from these funds after an year.
Which is the best dynamic asset allocation fund?
The best dynamic asset allocation fund is the one that aligns with your goals. It must also rank well on all quantitative and qualitative parameters such as returns, expense ratio, fund manager’s expertise, and turnover ratio.
What is the difference between a dynamic asset allocation fund and a balanced advantage fund?
Dynamic asset allocation funds and balanced advantage funds are the same. Since their asset allocation is dynamically managed, they are termed dynamic asset allocation funds. Also, as they balance the asset composition between equity and debt to take advantage of the market movements, they are known as balanced advantage funds.
