Dynamic Asset Allocation Mutual Funds

The market condition continues to change. There are some periods when equities do well and other periods when debts are more secure. This can be difficult to manage yourself. This is where the concept of Dynamic Asset Allocation Mutual Funds comes into play as it adjusts according to market performance.

What are Dynamic Asset Allocation Mutual Funds?

Also referred to as Balanced Advantage Funds, Dynamic Asset Allocation Mutual Funds are hybrid mutual funds which change the investments between equities and debt securities based on market values and the economy.

When the stock markets look attractive, the fund will invest more of its assets into equities to take advantage of growth potential. On the other hand, when the markets look expensive or volatile, the fund will cut down equity exposure by increasing investments in debt securities.

Features of Dynamic Asset Allocation Mutual Funds

• Asset Rebalancing Automatically: The fund manager constantly keeps track of the market conditions and rebalances between equity and debt instruments in the portfolio without investor intervention.
• Balancing of Risks: Through reducing equity weightings when the market is expensive and raising it when the market is cheap, such funds intend to balance out their risks.
• Diversification of Investments: Funds are allocated into different classes of assets in order to avoid concentration risk.
• Expert Fund Management: Professional fund managers allocate funds based on market analysis and valuation.
• Flexibility: Since these funds are made to thrive under different market conditions, they are an all-purpose investment opportunity.
• Ability to Generate Long-term Wealth: Equity and debt exposure gives investors an opportunity to gain from growth and stability.

How to Invest in Dynamic Asset Allocation Mutual Funds?

You can invest in dynamic asset allocation mutual funds by following simple process:

Step 1: Choose investment mode. You can invest through:

• AMC websites
• Online investment platforms provided by stockbrokers
• Mutual fund distributors

Step 2: Choose a suitable dynamic asset allocation mutual fund.

Step 3: Choose between Systematic Investment Plan (SIP) and Lump sum based on your goal and make investment.

Step 4: Make payment through UPI, netbanking or other available methods.

Why Invest in Dynamic Asset Allocation Mutual Funds?

• Minimised Market Timing Risks: It is difficult for most investors to identify the ideal time to get into or out of the markets. However, the fund managers will handle that task professionally for you.
• Risk-Adjusted Returns: An objective of dynamic asset allocation is to maximise returns while minimizing potential risks.
• Suitable for Conservative and Moderate Investors: The funds could be suited for conservative and moderate investors who are keen on balancing risk and return.
• Convenience: The investor does not have to move from one asset class to another manually. It is the responsibility of the fund manager.
• Portfolio Stability: Incorporation of the debt portfolio ensures reduction in risks, making the investment less volatile.

Taxation of Dynamic Asset Allocation Mutual Funds

Taxation is entirely based on the fund’s average equity allocation for a calendar year (including derivatives for hedging purposes) as per the income tax rules applicable. Considered as Equity Oriented Fund (Over 65% Equity Allocation) This kind of funds normally adopts an arbitrage approach in order to keep them under this category so as to provide the best tax advantage for investors.

• Short Term Capital Gain (STCG): If held for less than 12 months. It comes under the slab rate of 20% (plus cess).
• Long Term Capital Gain (LTCG): When units held for over 12 months. It comes under the slab rate of 12.5% (plus cess). Up to Rs. 1.25 lakh per annum tax-free on aggregate gains.

Fund is Classified as Hybrid Funds (> 35% and <65% Equities Exposure) The fund will no longer be considered as an equity investment but will not be subjected to debt taxation either.

• Short Term Capital Gains (STCG): If held for a period not exceeding 24 months, the gains earned from such funds shall be treated as STCGs and added to total income based on the income tax slab rates applicable.
• Long Term Capital Gains (LTCG): If the holding period exceeds 24 months, the gains earned shall be charged at 12.5% flat rate without any indexation benefits.

Considered Specified Mutual Funds / Debt-Based Portfolio (≤ 35% Investment in Equities) In case there is a sudden change to the portfolio in terms of debt and cash allocation, stringent provisions of Section 50AA of the Income Tax Act become applicable.

• Capital Gains Tax: For unit purchases made from April 1, 2023 onwards, all capital gains, irrespective of holding period, shall be considered as short term in nature.
• Tax Rate: The entire profit earned from such investments will be treated as income of the investor and taxed at the applicable slab rate of income tax.