Mutual funds: Check out dynamic asset allocation funds

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November 9, 2020 2:00 AM

Dynamic asset allocation funds provide downside risk protection more than the upside capture of returns, thus ensuring risk-adjusted return for long-term investors

Mutual fund investors prefer dynamic asset allocation funds as the investments are well-diversified, especially in an uncertain market.Mutual fund investors prefer dynamic asset allocation funds as the investments are well-diversified, especially in an uncertain market.

As the stock market remains volatile, investors willing to take a balanced approach to equity and debt investment should look at dynamic asset allocation funds of mutual funds. As the market regulator does not specify any minimum or maximum limit either for debt or equity investment in this category, the fund manager decides on the allocation based on price-to-earnings ratio of the stocks and the changing market conditions.

Mutual fund investors prefer dynamic asset allocation funds as the investments are well-diversified, especially in an uncertain market. Data from Association of Mutual Funds in India (AMFI) show that in the hybrid schemes category, dynamic asset allocation funds have net assets under management (AUM) of Rs 86,752 crore in September, next to the top category of balanced hybrid with AUM of Rs 1,11,090 crore. Dynamic asset allocation funds can help mitigate market volatility and returns on such funds are more dependable over longer periods as the investment is spread out.

Harshad Chetanwala, co-founder, MyWealthGrowth, says that within the hybrid fund space, dynamic asset allocation funds have liberty to invest in equities or debt without any restriction of minimum or maximum allocation. “This makes dynamic asset allocation funds a better choice within all hybrid funds for investors,” he says.

Similarly, Brijesh Damodaran, founder and managing partner, BellWether Advisors LLP, says, investors should look at dynamic asset allocation funds based on their risk profile and asset allocation. “Investors need to understand that these funds provide downside risk protection more than the upside capture of returns. If you can accept this thesis, then only you should look at these funds,” he says.

Opportunities across equity, debt
In dynamic asset allocation, the fund manager increases the exposure to equities when the investment metrics become favourable and brings it down when the metrics become unfavourable. This can improve the risk-adjusted return for long term investors. Depending on the market conditions, asset management companies fix the equity exposure.

Chetanwala says one of the elementary issues with this category is how different fund managers look at opportunities across equity and debt. “If we take the top three dynamic asset allocation funds by AUM at present, they have 80%, 62% and 45% in equity and rest in debt. This shows that each fund has a different view on the market conditions and there is nothing wrong in it. “Investors who like to rely on the expertise and skills of fund management in deciding the allocation in equities and debt, instead of managing on their own or by financial advisors based on their needs can look at these funds,’ he says.

Portfolio model
The portfolio model for dynamic asset allocation is done from various technical and fundamental indicators. When the market valuations are high, fund managers bring down the equity exposure and when the valuations are low, they increase the equity exposure. This helps in maintaining the equity and debt level at an ideal level and keeps emotions away.

Damodaran says dynamic asset allocation funds typically work on a model, which does not involve human intervention and works on analytics. “The investor needs to look into the model of the scheme —is it pro-cyclical or contrarian. In a recovery market, the contrarian model works better. And in a strong bull market, the pro-cyclical model works better. Depending on the risk profile, the investor should choose the option for investment,” he says.

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