Famous investor Warren Buffett once said, “There are two rules in investing. The first rule is to never lose money, and the second rule is to never forget the first rule.”
No investor wants to lose money, but financial markets do not always go the way you want them to. You cannot eliminate the risk of incurring a loss. But surely you can reduce this risk. Dynamic asset allocation funds tend to allow you to do so.
These funds come under hybrid mutual funds. They tend to be an ideal blend of equity and debt exposure, along with gold and real estate, for many investors. These funds have no obligations to compulsorily invest a fixed percentage only in equity or debt. Asset allocation in these funds is done to mitigate the risk during times of high volatility. For instance, when equity markets nosedived by 30% in March 2020, many dynamic asset allocation funds went down only by 10%.
Why choose dynamic asset allocation funds over other funds?
- Diversification: The fund manager of an equity fund has to predominantly invest in stocks, irrespective of the performance of equity markets. However, with dynamic asset allocation funds, managers can switch to other asset classes like debt instruments, gold, real estate, etc. when equity markets are falling. Thus, you get exposure to multiple asset classes with these funds.
- Steady returns: An equity fund can generate 2% annual returns or 50% annual returns, depending on the overall market performance. However, with dynamic asset allocation funds, the returns are usually steady and do not vary as much. This is because the managers of mutual fund can change the asset allocation if the expected returns are not adequate.
- Hedging: Hedging is done to protect one’s downside risk in the world of investment. A key reason why dynamic asset allocation funds are preferred is because they act as your umbrella when capital markets experience a lull or a period of uncertainty. Hedging is limited when you only invest in an equity or debt mutual fund.
- Multiple options: It’s always good to have options. Many equity or debt funds are pretty much the same, apart from a difference in the companies they hold in their portfolio. However, in dynamic asset allocation funds, portfolio rebalancing happens on multiple parameters like book value, market valuation, price to earnings (P/E ratio), technical indicators, market momentum etc. You can choose any fund based on the parameter you are comfortable with.
These were some of the key reasons to consider if you are wondering why dynamic asset allocation funds to reach our investment gals. Not many dynamic asset allocation funds problems are associated with investing in them. You must have an investment target of at least three years and stay invested for limited volatility and stable returns. Therefore, they could be good options for novice investors who have just started their investing journey, and could also be ideal for senior citizens who are usually risk-averse.