They reduce the element of risk and offer the benefits of growth (with equity) and stable returns (with debt). We explore the world of dynamic funds.
Many investors are often left confused about the differences and the viability of balanced funds and dynamic mutual funds. Let us establish at the outset that though both offer a switching option between fund asset classes to ensure growth and low risk, their asset allocation philosophy is different. Read on to know more about the dynamic fund.
How do dynamic funds work?
Dynamic mutual funds work on the principle of dynamic asset allocation. It is a strategy that employs the ability to switch between two types of securities – viz. equity and debt – to mitigate risk and generate growth over a longer period. In terms of dynamic mutual funds, the switch is done seamlessly between equity and debt to offer high growth at lowered risk. Thus, making the switch combines the benefits of equity and debt.
The dynamic fund is thus, an investment product just like debt funds, balanced funds, hedge funds, etc. You can have dynamic equity funds as well as dynamic debt funds, with higher or lower exposure to equities and debt.
Over to dynamic equity funds…
It is now easier to understand what dynamic equity is.
- At its simplest, it is a fund that generates high growth by investing in equity linked securities. Meanwhile, it also maximises the investment by parking money in money market options. Thus, it mitigates risk through proper asset allocation.
- But since it is a dynamic equity fund, the fund house cannot guarantee that that the scheme will show a predicated growth curve. It also cannot guarantee that your investment objectives will be fulfilled.
- However, careful handling of the fund with a study of its past performance can hold your investment in good stead. A simple way of ensuring that the fund grows without appreciable loss is to stay invested in it for a longer period.
The benefits of dynamic mutual funds
Consider why your portfolio can gain valuable traction by investing in dynamic mutual funds:
* Dual benefits in one fund: Since the fund seamlessly switches between asset classes, the gains are much higher as compared to other funds. This is because the debt component of the fund takes care of volatility while the equity component takes care of returns.
* No need to monitor it constantly: The dynamic fund switches automatically based on market conditions. With its automatic allocation, you are not required to monitor it constantly or do the asset allocation yourself. The dynamic asset allocation eases equity exposure automatically when stocks rise in price.
* Tax benefits: About 65% of the fund’s exposure is to equities, which means that you benefit from the tax-free returns associated with equities when you hold the fund for more than a year. Meanwhile, dividends on the fund are tax free and as per debt funds with exposure less than 65%.