Is it time to look at dynamic asset allocation models?
Read in: 3mins, Published On , 14 Jun 2017 By Times Of India
Investors with basic or no knowledge about investing often face the dilemma about where they should invest their hard earned money. The usual options they have are stocks, bonds, FDs, gold etc. Such dilemma is not unusual and at times is also good. After all an investor with such a dilemma is less likely to commit grave mistakes while investing. He/she would rather be conservative than reckless.
At times investors do take the initiative to learn the tricks about how and in which assets they should distribute their funds. They could also take the help of an experienced and registered financial planner or advisor to do the same for them.
DYNAMIC ASSET ALLOCATION FUNDS
To lessen the burden of those investors who want to go alone some mutual fund houses have launched schemes which allocate funds across stocks and debt, and in some cases a small portion in gold, as per some pre-set criteria or at the discretion of the fund manager. These funds are called dynamic assets allocation schemes.
HOW IT’S MANAGED
A dynamic asset allocation plan is the one in which the fund manager has the freedom to change the proportion of these assets as per his/her view of the market condition, mainly the direction in which the prices of these assets could move in future. Alternately fund houses also set some criteria, like price-to-earnings ratio, rate of inflation and the expected direction of the same, the yield on the 10-year gilts etc. to switch between assets. According to financial planners and advisors, investing in such a fund could be a better option for an investor who is trying to decide the perfect asset allocation himself/herself but lack the required expertise.
Dynamic asset allocation funds are very flexible about how much they should invest in which assets. If the fund manager thinks or the pre-set data signal that the equity market is extremely over-sold and a bull rally could start anytime, they could shift all the money they manage into stocks. In this case there will not be any allocation to debt or gold. The reverse is also true: If the signals are that the end of a bull run is nearing, the fund would shift all their money into debt and may be a small part in gold too, financial planners and advisors say.
DYNAMIC ASSET ALLOCATION VS BALANCED FUND
There is a fundamental difference between a dynamic asset allocation fund and a balanced fund. In most balanced funds, the equity portion will never fall below 65%. This is done for better tax efficiencies. On the other hand, dynamic asset allocation plans are not restricted by such rules. So in these funds in the search for higher returns, the investor may have to pay a bit more tax than a pure balanced fund. So if you are invested in a dynamic asset allocation fund, and get a post-tax return that’s higher than what you get in a balanced fund, you are a winner.
ROLE OF GOLD
Given Indians’ affinity for gold, some dynamic asset allocation plans allocate a small portion of the portfolio in gold, which is used as a hedge against inflation.
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