What are dynamic asset allocation funds?
Dynamic asset allocation funds, also known as balanced advantage funds, are hybrid funds that invest primarily in stocks and bonds, as well as real estate and other asset classes. These are actively managed funds in which the fund manager switches between equity and debt, based on market valuation of these assets.
These funds are not restricted in any way by asset type or market capitalization. Due of their dynamic and diversified structure, these funds attempt to limit any huge loss that can be caused by the underperformance of any one single asset type. These funds are well-known for their consistent and periodic returns throughout their duration.
What kind of returns can you expect?
In the long run, dynamic asset allocation funds provide reasonable returns. However, since these are not entirely committed to equities and equity-related instruments, their returns may be lower than those of a pure equity fund. As a result, you should not expect return of more than 10 per cent.
What are the underlying risks?
There is no such thing as a risk-free investment. The same may be said of a dynamic asset allocation fund. As the fund is exposed to both stocks and bonds, it would bear the underlying risk of equity, which is a market risk, as well as credit risk, interest rate risk, reinvestment risk, and so on.
What investment horizon is suited for dynamic asset allocation funds?
According to research conducted across the world, you would be able to observe the impact of compounding after seven years. As a result, in order to get the benefit of these funds, you must invest in them for at least seven years.
Who should invest in them?
Since dynamic asset allocation funds invest in assets from diverse asset classes, investors gain from diversification. Furthermore, if you do not have the time to monitor your portfolio, consider investing in dynamic asset allocation funds, which modify their asset allocation based on market valuation of the assets.
Furthermore, investors who are somewhat conservative to moderate risk-takers and are willing to take a bit more risk can consider investing in these funds.