Dynamic Asset Allocation Mutual Funds-Should you opt for it?
Recently you would have seen advertising of DSP BR Dynamic Asset Allocation Mutual fund. Some of the mutual fund houses are in the process of floating such dynamic asset allocation funds now. Such mutual fund schemes indicate that it identifies asset allocations between equity and debt on a regular basis. What is unique about Dynamic Asset Allocation Funds? What are its features, positive factors and negative points one need to consider before investing in such funds?
What is Dynamic Asset Allocation Mutual fund?
Dynamic Asset Allocation Fund is a new set of schemes issued by Mutual fund AMC’s. It identifies the appropriate asset allocation between equity and debt by comparing relative merits of investing either of them. It considers Yield gap ratio concept.
Features of Dynamic Asset Allocation Mutual fund?
- Such schemes automatically re-balances, portfolio to get high returns and also limit the downside for investors in market downturns.
- It uses yield gap metrics to assess how markets are valued.
- This scheme increase portfolio alignment to debt during market downturn an decreases in debt during market bull runs.
What is Yield gap metric?
Since this scheme runs on yield gap metric, it is important for us to understand this. Such funds track nifty earning yields Vs G-Sec Yield and take the asset allocation. If nifty earnings yield is low compared to G-Sec yield, the assets are allocated more towards debt to earn highest returns comparing to Nifty returns. E.g. if Nifty is giving 8% returns and Govt security is giving 8.2% returns, it would invest more towards debt as returns are higher in debt. Similarly, if nifty is giving 10% returns and G sec is giving 8.5% returns, it automatically allocates more portfolio alignment towards equity to get higher exposure.
Does it have any negative side?
- Such scheme cannot predict sudden market crash through this model
- This invests in Debt (up to 90%), hence this is treated as a debt fund for the purpose of taxation. You may need to pay tax on long term capital gain (10% of the long term capital gain or 20% on indexation)
- New model, yet to get maturity level, so we need to watch for 1-2 years to understand how best this is suitable for high risk investors.
- High debt allocation during market downturn may lead to limited returns
For whom this scheme is suitable?
- This scheme is suitable for investors who look for long term wealth creation.
- Investors who are looking for limited downside, but to earn the highest returns during bull runs.
- Since the asset allocation dynamically changes compared to the market condition, this could be treated as high risk to moderate risk mutual fund. If you are willing to take such risk, you can invest in such mutual funds.
Currently any mutual fund house is offering this Dynamic Asset Allocation Mutual fund now?
Yes. Currently, DSP Black Rock is offering Dynamic Asset Allocation Fund where NFO closes on 31-January-2014. You can check the positive factors, negative points and its suitable before buying such funds.
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Dynamic Asset Allocation Mutual Funds
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