Top 10 Dynamic Asset Allocation Funds to Invest in 2022
Dynamic asset allocation funds are a type of open-ended hybrid scheme where the percentage of equity and debt allocation can be anywhere from 0% to 100%. The fund managers of these mutual funds spread out their asset allocation across different sectors as per the prevalent market conditions.
These mutual funds are a suitable investment option for investors looking for stable performance irrespective of the market scenario.
List of Top 10 Dynamic Asset Allocation Funds in 2022
The table given below illustrates the best dynamic asset allocation funds in India in 2022 based on their five years annualized returns:
|Name of Dynamic Asset Allocation Fund||5 Year Annualized Returns|
|HDFC Balanced Advantage Fund-Direct Plan-Growth||13.13%|
|Edelweiss Balanced Advantage Fund-Direct Plan-Growth||12.52%|
|ICICI Prudential Balanced Advantage Fund- Direct Plan- Growth||10.98%|
|Nippon India Balanced Advantage Fund- Direct Plan- Growth||10.16%|
|IDFC Balanced Advantage Fund- Direct Plan- Growth||9.71%|
|Aditya Birla Sun Life Balanced Advantage Fund- Direct Plan- Growth||9.54%|
|Axis Balanced Advantage Fund- Direct Plan- Growth||8.94%|
|DSP Dynamic Asset Allocation Fund- Direct Plan- Growth||8.76%|
|L&T Balanced Advantage Fund- Direct Plan- Growth||8.57%|
|Sundaram Balanced Advantage Fund- Direct Plan- Growth||7.66%|
How Do Dynamic Asset Allocation Funds Work?
In a bearish market, prices of stocks can decrease rapidly. As a result, investors may incur substantial losses. However, if they invest in dynamic asset allocation funds, they have a higher chance of making profits irrespective of the market situation.
The fund managers of these mutual funds increase or decrease the asset allocation to equity and debt instruments depending on the situation in the stock market. This is particularly helpful for investors because they do not have to worry about altering the asset allocation as per the market condition.
To make decisions on the debt-equity mix, fund managers typically consider the medium to long-term outlook of the asset class. For equity investments, they can consider financial metrics like the PE (Price to Earnings Ratio) and the PB (Price to Book) ratio. Furthermore, they take into account the interest rate cycle before investing in debt instruments.
Over the investment period, the fund manager will reduce exposure to overvalued assets while investing in undervalued assets or those that have the potential for better performance. If necessary, fund managers will rebalance the portfolio on a daily basis in a volatile market.
Generally, when valuations are low, fund managers usually raise the asset allocation for equity in the portfolio. However, the methodology for calculation is different for every fund house.
Features and Benefits of Dynamic Asset Allocation Funds
Detailed below are the features and benefits of these mutual fund schemes:
- Process-driven approach
An underlying feature of dynamic asset allocation funds is its strict process-driven investment approach. This approach allows the fund manager to decide when it is the right time to increase/decrease investments in equity/debt instruments. This is particularly helpful for investors who find it difficult to sell underperforming investments.
- Risk-adjusted returns
Dynamic asset allocation funds have a diversified portfolio which reduces risk and provides high returns. Additionally, fund managers of dynamic asset allocation funds effectively manage the risk factor by ensuring that the funds are not overexposed to any particular asset class. As a result, these funds tend to generate stable risk-adjusted returns in both bearish and bullish markets.
Who Should Invest in these Mutual Funds?
Given below are the details of investors who may want to invest in these hybrid funds:
- Dynamic asset allocation funds are suitable for conservative investors who wish to limit exposure in the market but earn consistent and stable returns over a long period.
- People waiting for a suitable market valuation level to invest in the stock market can also choose dynamic asset allocation mutual funds.
- Investors who are making financial plans for their retirement or any other long-term plan for other events can invest in these mutual fund schemes.
Taxation of Dynamic Asset Allocation Mutual Funds
The taxation of a dynamic asset allocation fund will depend on its current asset allocation. It will be taxed similarly to an equity fund if equity or equity-linked instruments hold 65% or more of the total assets. However, if the maximum of the allocated assets is in debt instruments, taxation rules for debt funds are applicable.
Investors of dynamic asset allocation funds earn returns through dividends and capital gains. The dividends get added to their taxable income, and applicable taxes depend on the individual’s income tax slab rate. Calculations of capital gains depend on the asset class (equity or debt) and the holding period.
The table below illustrates applicable tax rates for short-term gains:
|Asset Class||Short Term Gains||Tax Rate|
|Equity oriented funds||Less than 12 months||15%(plus cess and surcharge)|
|Debt oriented funds||Less than 36 months||Tax slab rate of the investor|
The table below illustrates applicable tax rates for long-term gains:
|Asset Class||Long Term Gains||Tax Rate|
|Equity oriented funds||12 months and more||10% (plus cess and surcharge) for amounts exceeding Rs. 1 lakhTax-exempt up to Rs. 1 lakh|
|Debt oriented funds||36 months and more||20% with indexation (plus cess and surcharge)|
Things to Consider before Investment
Given below are the important things to consider before investing in dynamic asset allocation funds:
- The expertise of fund managers
Fund managers of these mutual fund schemes play an essential role because they rebalance the portfolio after assessing the market situation. Moreover, they are responsible for creating strategies that safeguard the fund against market volatility. Therefore, it is vital to assess the experience of fund managers before investing in dynamic asset allocation funds.
- Risk assessment
Before investing, people must consider the risks associated with the mutual fund scheme. Risk can range from low to medium for a dynamic asset allocation fund. This depends on the allocation of equity and debt assets and their individual risks.
- Investment horizon
It takes these mutual funds around 3 to 5 years to go through various market cycles and generate good returns. Therefore, investors should align their financial goals accordingly before investing in these mutual fund schemes.
- Investment cost
If the fund has a high expense ratio, it will negate the returns earned. In such a situation, the investment may not be viable. Therefore, investors must consider the overall investment cost when they invest in a dynamic asset allocation fund.
By going through the above sections, one can understand the workings and benefits of dynamic asset allocation funds. These are hybrid schemes where the expertise and decision-making ability of fund managers ensure that investors receive optimal returns irrespective of the market situation. Investors should consider their risk appetite and investment goals before making a decision.
FAQs about Dynamic Asset Allocation
Are dynamic asset allocation funds actively managed or passively managed?
Dynamic asset allocation funds are classified as actively managed funds. These funds invest in a mix of equity and debt instruments depending on market movements. Additionally, these funds are also called balanced advantage funds.
Should I invest in dynamic asset allocation funds in a bearish market?
Fund managers of dynamic asset allocation funds rebalance various asset classes as per market trends. This strategy facilitates the mitigation of risks. So, you may consider investing in these schemes in both bearish and bullish markets. However, make sure to check the scheme’s past performance, risk levels and financial goals before investing.
What are the disadvantages of dynamic asset allocation funds?
Dynamic asset allocation funds have the following limitations:
> The fund manager has to actively manage and control these funds. Therefore, their performance is highly dependent on the fund manager’s abilities.
> Additionally, these funds are associated with high transaction cost
Which are the top dynamic asset allocation funds in India?
Some of the top dynamic asset allocation funds in India are listed below:
> HDFC Balanced Advantage Fund-Direct Plan-Growth
> Edelweiss Balanced Advantage Fund-Direct Plan-Growth
> ICICI Prudential Balanced Advantage Fund-Direct Plan-Growth
> Nippon India Balanced Advantage Fund-Direct Plan-Growth
> IDFC Balanced Advantage Fund-Direct Plan-Growth
Why should you invest in dynamic asset allocation funds?
Dynamic asset allocation funds enable investors to take advantage of the long-term growth potential of equities with low volatility. These schemes facilitate the systematic management of equity and debt instruments. Moreover, these funds generate better risk-adjusted returns for medium to long-term investors.