Why Dynamic Asset Allocation Funds Should Be Integral Part Of One’s Portfolio

One of the biggest challenges an investor faces while trying to invest is deciding between asset classes e.g. whether to invest in debt or equity? But one can actually invest in both debt and equity instruments through just a single fund. Such a fund is called a Dynamic Asset Allocation Fund (DAAF) or Balanced Advantage Fund (BAF). This category offering also aids in reducing the portfolio risk while working towards enhancing the return profile.

As the name suggests, these funds dynamically allocate money between equity and debt basis market metrics or in-house models which assesses and analyses market conditions. This means that depending on market conditions, such an offering can dynamically increase or decrease their equity and debt holdings. For instance, when the equity valuation is cheap, the fund increases its allocation to equities and vice versa.

Here is why DAAF should be a part of every investor’s portfolio:

In-built portfolio diversification

DAAF gives the best of both worlds – equity and debt. The equity investments in the fund help you benefit from the long-term growth potential of equities while debt investments in the fund aids in limiting the portfolio downside by generating a stable return. Hence, even in case of a sharp correction in case of equity markets, the debt element will help curtail overall portfolio volatility. Within equity allocation, DAAFs have flexibility to invest across market capitalisation – large, mid and small caps. As a result, the presence of large-cap provides the equity portion of the portfolio stability and liquidity while mid- and small-caps bring in tremendous growth potential.

It is always good to create a well-diversified portfolio so that sharp movements in any one asset class does not have a sizeable impact on the overall health of one’s portfolio.

Aids in buy low, sell high

While buy low and sell high tends to be the motto of every equity investor, implementing this remains a challenge. This is because investors tend to be nervous when equity market turns volatile. By investing in DAAF, an investor gets to make the most out of volatile times thereby creating wealth over long term. DAAF scheme effectively manages volatility and automatically rebalances whenever required. The fund manager here will buy stocks when they are available at relatively cheaper valuation and sells them at higher valuation as the market rises, which is not always possible for a lay investor.

Eliminates behavioural biases

A common behavioural pattern seen among investors is to invest when market rallies even at higher valuations and then pause or sell when the market corrects. This investing behaviour tends to hurt an investor in the long run in the form of sub-optimal returns. By investing in DAAF, one will not need to tinker with one’s investment as the fund manager will do the needful from time-to-time.

Better risk-adjusted returns

With an ability to reduce the downside potential in an investment, especially during volatile time, the returns generated by DAAF category funds tend to be much more stable than say an equity category fund. Historical data shows that even when benchmark indices generated negligible or flat returns, DAAF strategy was able to generate significant returns for patient investors.

Taxation

Engaging in active asset allocation at an investor’s end may lead to higher tax impact. When the same is done at the fund level, an investor does not incur short or long term capital gains tax which is a win-win for the investor.

Given the nature of fund, a risk-averse investor can use this fund for equity exposure since it offers them an opportunity to invest in equities without taking higher risk. At a time when there is global uncertainty, fears of a probable recession and heightened market volatility, investors can consider investing even lump sum in this category funds.

To conclude, if you are an investor who is unsure of allocating between equity and debt assets, then let the DAAF category funds do it for you in a systematic manner wherein the fund manager will help optimise on the opportunities present across these two asset classes.