The stock market slid on Monday in response to tremendous selling pressure on concerns around the HMPV virus, and on foreign institutional investors (FII) sell-off, resulting in benchmark indices declining by over 1.5 per cent.

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Amid all this, sectoral indices witnessed steep losses and the worst-affected sectors included Nifty PSU Bank, Metal, and Realty sectors.

Under these turbulent market conditions, investors are looking for what can reduce risks but still offer optimum returns. Dynamic asset allocation funds are one of those investments which are seen quite sought after among retail investors.

These schemes give flexibility to the fund managers to maintain an ideal debt-equity ratio in a portfolio so that they can react to a sudden change in the market.

What are dynamic asset allocation funds?

Dynamic asset allocation funds, also known as balanced advantage funds, are mutual fund schemes that invest in a mix of equity securities and fixed income instruments. The key feature of these funds is their dynamic approach to asset allocation, meaning the proportion of equity and debt is adjusted based on market conditions.

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These funds have the freedom to allocate anywhere from 0% to 100% in both equity and debt instruments, as per the Securities and Exchange Board of India (SEBI) categorization.

Protect downside amid volatility

The equity exposure in dynamic asset allocation funds is often decided based on several factors, including market trends, valuations, and the fund’s specific mandate.

Paras Matalia, Fund Manager, SAMCO Mutual Fund explains, “If the fund can manage its equity exposure on a daily basis, it can have significant advantages. These types of dynamic funds can be a great investment option as they are designed to protect downside if the markets crash with lower net equity exposures, while they will be able to increase their net equity exposure when the markets start inching upwards.”

Devender Singhal, Executive Vice President & Fund Manager, Kotak Mutual Fund emphasises the value of dynamic allocation in times of high market volatility.

“A dynamic allocation helps cushion the fund in times of high volatility like current and helps in generating good risk-adjusted returns over a long period of time. These funds are also a bit more tax efficient than having investors investing separately in equity or debt funds,” he says.

Long term appreciation

Another key advantage of dynamic asset mutual funds is that they offer long term capital appreciation with lower volatility.

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Saurav Basu, Head, Wealth Management, Tata Capital says, “Dynamic asset allocation funds aim to deliver long-term capital appreciation with lower volatility by dynamically adjusting investments between equity, debt, and arbitrage opportunities. For example, if equities appear overvalued, managers may reduce equity exposure and increase allocation to bonds. This dynamic strategy enables the fund to seize market opportunities while mitigating risks, ultimately striving for optimal returns with controlled risk. For instance, during the recent market correction (from Sep 26, 2024, to Jan 3, 2025, as per Morningstar), the Nifty 50 declined by 8.4 per cent, whereas the category average fell by only 3%.”

Where process overtakes emotions

Another advantage, mentions one expert, is that these funds prioritise systematic approach over emotional mistakes.

“Dynamic asset allocation funds can be effective in managing risk, as professional fund managers use these models to decide the optimal equity-debt allocation. Additionally, investors often make emotional decisions, leading them to buy high and sell low. The systematic approach of dynamic asset allocation funds helps avoid such emotional investment mistakes,” says Roopali Prabhu, CIO and Head of Products and Solutions, Sanctum Wealth.

To sum up, dynamic asset allocation funds are a feasible investment option during a volatile market. This is because these funds offer protection during downswings, and exploit growth possibilities when markets recover because of their inherent characteristic to tweak the debt-equity ratio in line with market conditions.

Besides risk reduction, the funds offer professional perspectives, meaning they are more tax efficient compared to individual equity and debt investments. Dynamic asset allocation funds might be an ideal choice for those investors who would like to develop a comprehensive approach to investing in uncertain markets.

Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.