Every stock market investor will want to buy equities when markets are at the lowest and sell them when the markets are at their peak. Dynamic funds switch between different asset classes depending on the dynamic fund’s attractiveness. These funds are specifically designed to switch seamlessly between equity and debt, depending on the conditions of the market. The fund manager of dynamic funds will shift between asset classes based on the attractiveness as indicated by certain valuation metrics. Whenever there is a rising market scenario, these funds will invest a large portion of the corpus in equities and hold a lesser amount in debt and cash. Dynamic funds aim to switch between equity and debt, and they provide more opportunities. These asset allocation funds will act as a shield against market downsizing and they generally lose less money when the markets are down. If an investor wishes to make profits by buying and selling securities on different exchanges, they can opt for an arbitrage fund.
Dynamic funds generally aim to invest in equity but can react quickly to a negative market by moving 100% of its assets into money market instruments, fixed income securities and derivatives. Dynamic funds represent the combination of assets and the additional benefit of timing. Dynamic funds are also known as opportunity funds, because the entire concept of dynamic funds is based on identifying and making the best of opportunities. Dynamic funds use the dynamic nature to shift portfolio allocation between these categories so the fund can get the best of periodic out performance by specific themes.
5 benefits of dynamic funds:
1. Benefit of both:
The prime feature about dynamic funds is its ability to switch its asset classes within the asset allocation, even quicker than hybrid funds as this factor will aim to select small cap and mid cap stocks and the gains that the equity component can give are much higher and the associated risk is also well taken care of by the debt investment. This will make the dynamic funds which are less prone to investor’s assets during volatility.
2. Gives the investor time to think:
Since the asset classes switch as per the market conditions, the fund will auto-allocate itself according to the varying market trends and leaves you to relax and not panic in times of the market correction. One of the reasons to invest in dynamic funds is their factor to calibrate the market.
3. Think, execute and chill:
Not all investment objectives can be the same. Investors who prefer to use their money in mutual funds because of their long-term wealth creation objective could take the nature of dynamic funds as an investment option. They allow most of their investors to forget about their investments as they do not have to worry about entry or exit.
4. Funds provide potential to give returns:
Dynamic funds create an impression or potential of being absolute return funds. They not only define their job as producing long term returns, but additionally also ensure reduce equity exposure.
5. Cut down on taxes:
Dynamic funds allow itself to be taxed like other equity funds. They also seem to benefit tax-free returns if holding period happens to exceed one year. Dividends are tax free and the treatment of tax is similar to that of debt funds.
Swarali Chavan is a finance professor. In her free time, she reads upon and studies about market investment instruments. She has spent considerable time researching ondynamic funds. In this article, she has highlighted the benefits of dynamic funds.