When the sea is rough don’t try to go against the wind, Stay Calm and find a different way to cross the sea. Its same as DAAF.
Dynamic Asset Allocation Funds invest in a mix of stocks and FD-like instruments.
However, they keep changing this allocation based on the market conditions to provide you optimal returns with minimal risk.
What is Dynamic Asset Allocation (DAA)?
As per the Securities Exchange Board of India (SEBIs) new fund categorization regulation,
Dynamic asset allocation funds are the hybrid funds that invest across equity and debt in such a manner so as to minimize risk based on market trends.
It is mainly used by hedge funds, mutual funds, credit derivatives, index funds, principal protected funds, and other structured investment products.
How does dynamic asset allocation fund works?
Primarily, the working of the fund directly depends on the fund manager’s ability to match the right decision of asset allocation.
So with the market low or high, equity exposure of the fund is decided.
For instance: If the economy is not going good, then the investment manager using this strategy would reduce his equity exposure and would prefer more investments in interest-bearing securities or even sit on cash till the economy’s situation changes and vice versa.
Advantages:
- Flexible – Allocation of assets relative to market conditions
- Considerable returns due to re-balancing
- Suitable for low-risk appetite investors
- Suitable for Long term investors
- High return percentage compared to bank deposits.
Disadvantages:
- High Transaction Cost
- Time-consuming as it actively requires to be monitored and controlled by the investment manager.
Who should invest in dynamic asset funds?
These funds are best suited for the long- term Investors who though have a low-risk appetite but are ready to take a bit of risk to enjoy the returns from an equity-debt mix of assets in their portfolio.
So the investors can enjoy equity kind of returns but with a balanced portfolio. As this fund re-balances during volatility thus investors can rest in peace.
Tax Implication:
- The biggest advantage of these funds is that they are structured in such a way that they are taxed as equity funds for investors.
- When this fund lowers its equity exposure, it ensures that equity plus arbitrage component of the scheme is at least 65% of the corpus, which helps it, to qualify for equity taxation.
What makes Dynamic Asset Allocation Funds even more attractive is their tax-free nature.
- Dividends from these funds and gains after one year are completely tax-free.
Even short-term gains are taxed at 15%, which is lower than the rate applicable on pure debt funds or bank deposits.
Key Takeaways
- Dynamic asset allocation is a hybrid of active and passive investing.
- Dynamic asset allocation should be preferred for medium to long term time horizons.
- Dynamic asset allocations offer stable returns with low volatility.
- As compared to the traditional instruments, these funds offer better returns.
- These funds also remove the investor’s concern regarding the volatility of equities due to their frequent re-balancing with the market conditions
Disclaimer: All the views in the video are personal of the author not attributing to any one.
