Today I decided to pick up a topic which may be of interest to many, if not all, of us. We are in the middle of an unprecedented medical crisis, COVID-19 spread across the world has brought the life to a halt, it not only impacted the social aspects, but has significantly impacted the economic aspect. The extent of impact is yet not known and may take a long time to recover. On the economic front its no less that a financial crisis, of magnitude that has probably not impacted us ever in past. This situation has left several of us in dilemma; what’s the best investment strategy to follow?

In simple terms, we would like to build a portfolio, across assets classes, which could target maximum return with effective management of downside risk, and if someone professional could do it for us, even better.

This brings me to the topic of my story today – Dynamic Asset Allocation Fund.

So, what’s Dynamic Allocation Fund. These are hybrid funds that invest in a mix of asset classes, Equity, Debt, Equity Derivatives etc. and are managed dynamically. Based on the fund objective investments are actively monitored and portfolio is rebalanced depending on market dynamics, increasing equity exposure when valuations are attractive and lowering when valuations are expensive.
These funds invest in a way that minimizes risk based on market trends, and are targeted at first time and low-risk appetite investors. Most fund houses have rule-based management of these funds to avoid impact of individual fund manager’s understanding of market dynamics. Having understood this, we come to our next question.

What are Advantages of Dynamic Allocation Funds? There are three common advantages, Diversification, better returns and volatility management. Diversification is the key to better returns, particularly during market volatility, funds invest in multiple asset classes and dynamically change asset allocations based on market conditions to achieve superior returns. By avoiding major fluctuations due to diversified portfolio, these funds attempt to provide stable returns. Markets follow up and down trends, and not all assets go through the similar cycles, therefore any diversified portfolio is better placed to manage such dynamics and target stable returns. Investors, looking for lower risk and more stable returns should invest into these funds.

So far so good, but what are disadvantages? First and foremost, disadvantage is the fund expenses, the transaction costs in dynamic asset allocation funds are high when compared to a constant portfolio fund. With continuous rebalancing of the portfolio, the costs tend to be on the higher side. The expense ratio is calculated as a percentage of the NAV. Hence the gains tend to be lower in this case.
Most fund houses have these funds and investors are advised to consult their financial advisors to make best choice.