Should you invest in dynamic asset allocation funds?

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Dynamic asset allocation funds or balanced advantage funds are gaining ground in recent times. These funds received cumulative net inflows totaling Rs YTD 10,495 crore, which is higher than the inflows received by any category of equity fund.

How do they work

Dynamic asset allocation funds have the flexibility to juggle equity and debt exposure at the discretion of the fund manager. Fund managers can increase or decrease the allocation to equities based on prevailing valuations. For example, some funds increase their exposure to equities if valuations are low and vice versa. They also take into account other indicators such as Price to Book Ratio, market capitalization to GDP, etc. The majority of these fund portfolios are focused on large caps. They can also take a position on derivative products. Since these funds also invest in debt, you should check the underlying credit quality of the portfolio. Most of these funds invest in sovereign and AAA rated papers and have very minimal exposure to AA.

What advisers / MFDs have to say

Fund companies have been promoting these funds lately, which aim to reduce downside risk, offer investors the opportunity to participate in stocks and, at the same time, avoid the hassle of deciding to invest. asset allocation. But not all are convinced by the pitch. Essentially, there are two camps when it comes to investing in dynamic asset allocation funds. It is believed that exposure to equities and debt should be separated. Proponents believe that such funds take the hassle out of managing the asset allocation to the advisor and can be a good way for new investors to participate in stocks.

“I recommend dynamic asset allocation funds if the client is cautious but needs some exposure to equities. The flip side of Dynamic Asset Funds is that they are taxed like debt funds if their equity stake is less than 65%. For investors looking for a prudent investment and if they can hold more than three years, these funds can be considered because they will benefit from an indexation advantage in the event of taxation of the debt ”, explains Sridhaba Mahapatro , MFD based in Hyderabad.

Some distributors like to keep the distribution separate. “We do not recommend dynamic asset allocation at this time as most of our clients favor equities. We focus on the separation of debt and equity allocation. Having said that, there are funds that can do asset allocation for investors, but we prefer to invest separately in debt funds as it helps to pull out of the right asset class in an emergency ”, explains Vinod Jain, Founder, Jain Privy Client.

Mumbai-based MFD Rushabh Desai shares Jain’s perspective. “Keeping the equity and debt portfolios separate makes sense because it helps mitigate risk much better. The portfolios (especially credit quality and debt liquidity) and strategy of the fund are easy to follow. In an emergency, if market conditions are not favorable, it can be very difficult for investors to withdraw their entire corpus at once and may face substantial losses during redemptions.

“In general, I don’t recommend aggressive asset allocation funds. Even though fund companies claim they are trying to synchronize the market better, past history has shown that neither Dynamic Funds nor anyone can perfectly synchronize the market. However, such funds can protect the disadvantages. When we do asset allocation and rebalance once a year with full control over equity and debt, I feel more comfortable than blindly giving someone else complete freedom. Explains RIA Basavaraj Tonagatti, based in Bengaluru.

Types of hybrid funds

Note that there are five types of funds in the hybrid fund category, which can be confusing for new investors. Here is the extent of exposure that each of these funds can take in equities.

(Stay in debt, cash and others)

Performance of Dynamic Asset compared to other hybrid funds (Morningstar category)

Over a five-year period, the difference between the returns of balanced allocation funds (minimum 40% equity allocation) and dynamic asset allocation funds is 61 basis points. This seems to suggest that actively managing the allocation by synchronizing the market hasn’t helped much as returns converge over time.

Current exposure to equities

In response to the rally since March 2020, many funds have reduced their exposure to equities. For example, Aditya Birla Sun Life Balanced Advantage Fund reduced its equity exposure from 81% in May 2020 to 48% in June 2021. Likewise, ICICI Prudential Balanced Advantage Fund reduced its exposure to equities from 73% to 38% over the same period.

But not all funds are managed the same. HDFC Balanced Advantage Fund takes more aggressive exposure to equities. Its average exposure to equities over the past five years has been around 78%, compared to an average of 30 to 60% for other funds in the category. Since the March 2020 crash, the HDFC Balanced Fund has maintained an average exposure to equities at 80%, which has allowed the fund to capture the upside. Thus, HDFC Balanced Advantage topped the return chart at 47.63% over a period of one year to July 29, 2021. On the other hand, BOI Axa Equity Debt Rebalancer Fund generated the lowest return at 10.70% over the same period, with the fund having maintained an average of 36% since the March 2020 crash.

Choose wisely

Rushabh says DAAFs are not bad if they are well managed. He recommends investors not to put their entire corpus in this category on the assumption that their asset allocation will be supported. “Investors who are looking for low volatility in stocks, who don’t know when to buy and when to sell, who have a medium risk appetite and are willing to invest in these funds for at least 3 to 5 years may consider venture into these funds in their actions. wallets.

You should choose these funds after determining the extent of volatility / risk with which you are comfortable. You should not expect these funds to provide returns comparable to those of other actively managed equity funds that take equity exposure of up to 90%. “There is no doubt that during stock market crashes some well-managed DAAFs will fall comparatively less than pure equity funds, but investors should be aware that even well-managed DAAFs can show negative double-digit returns during crashes. fellows. This means that these funds do not fully protect against downside volatility, ”warns Rushabh.

During the year 2020, DAAF recorded a maximum drop of -12% to -34%, while Sensex fell by -38%. So these funds are not completely immune to downside risk and your capital is at risk.


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