Afraid of too much exposure to equities, but want higher growth than debt funds can offer? Consider investing in dynamic equity mutual funds.
As an investor wanting a higher rate of return on your money, you normally gravitate more towards equities. While equity funds certainly promise higher returns, they are accompanied by a high degree of volatility as well. One way to grapple with equity funds is to stay invested in them for a longer time so that you can ride out the market volatility and get higher returns.
But your rate of return will be higher with an option known as dynamic equity mutual fund. It is an instrument to increase the capital appreciation by dynamically allocating assets in equities. Its secondary purpose is to provide regular and relatively risk-free returns by investing in debt securities.
How do dynamic mutual funds work?
Equity funds are helpful options for investors who are a little risk-averse. The fund parks your money in high grade equities, which do well in a bullish market and go slower in a bearish one. But while this manner of investment can certainly help you pare down the potential for loss, it can also affect the rate of return of the fund. Thus, it has an effect on how much your investment gains over the long run.
Now if you were to invest in dynamic mutual funds, the propensity for loss would be pared down even as the potential for higher returns goes up. This is how they work:
- The best dynamic mutual funds today invest in both equity and debt instruments. However, they perform the vital function of dynamically adjusting the equity allocation of the fund based on prevalent market conditions.
- Thus, if the markets are performing poorly at the moment, there will be higher percentage adjustment towards debt. This stabilises the fund and reduces the loss potential.
- The reallocation of equities is capped between 30% to 50% in most cases. However, some dynamic equity funds may offer even 100% net exposure to equities, based on market conditions. This contains market volatility quite admirably, which basic equity funds cannot do.
- The dynamic mutual funds, thus, offer a rule-based equity allocation readjustment model that investors can soon get familiar with.
Selecting the right dynamic mutual funds is easy
It is easy enough to pick the dynamic equity fund that suits your investment purposes, starting with the right fund house to work with.
- Access the fund house’s website and check the current dynamic mutual funds being offered. Look out for indices like projected rate of return and past performance.
- Check the fund house’s expense ratio and other charges for maintaining the fund.
- Register with the fund house if you are working with them for the first time. Note the log in credentials carefully.
- Set up an auto-debit facility linking your bank account with the fund.