Financial Planning

Benefits of Dynamic Funds

Posted Gopal Gidwani

Dynamic funds are an investment strategy adopted by fund houses. Such funds switch between equity and debt instruments based on the market conditions and valuation metrics.

Dynamic funds have certain unique features that offer benefits to investors. Here are five benefits of investing in such types of funds.

1. Dual benefits
The primary feature of these kinds of mutual funds (MFs) is their capability to switch between different asset classes. The asset allocation is easily modified thereby providing investors with an opportunity to earn higher profits through mid and small-cap stock investing. The risks associated with equity invested are mitigated by the debt products included in the fund portfolio. This provides the dual benefit of earning higher returns through equities while mitigating risks with debt products.

2. Informed decisions
The asset allocation is modified by experienced and knowledgeable fund managers based on the market situations. Some funds include an auto-allocation mechanism where the switch is done when market conditions change. This ensures investors do not make any emotional or hasty decisions during adverse market conditions. The ability of dynamic funds to calibrate as per market situations makes these MFs popular.

3. Long-term wealth creation
Investors have different financial goals over a period of time. Generally, individuals opt for MF investments with the objective of wealth creation over the long-term. Dynamic funds provide an excellent option for investors who want to assume lower risk but want to build wealth to achieve their financial objectives.

4. Potential to provide higher gains
These types of MFs provide the potential of offering absolute returns on investments. Such products offer investors the opportunity to benefit from higher profits through equity investing. Furthermore, the exposure in the equity markets is reduced when the valuations are high. The dynamic asset allocation feature is strategically developed to ensure lower equity investments when stocks become more expensive.

5. Tax benefits
Most dynamic funds limit the equity exposure to approximately 65% of the fund corpus. Therefore, these are treated like other kinds of equity MFs. Thus, investors may take advantage of the tax benefits available to equity funds when these are held for more than one year. However, if the units are redeemed before one year from the date of investment, investors need to pay short-term capital gains tax. If an individual opts for the dividend option while investing in the dynamic fund, the income is tax-free and tax treatment on such investments is similar to regular debt funds when average exposure is below 65%. However, it is important to consult an experienced tax advisor to know the precise tax benefits available under such schemes.

When an investor opts to invest in dynamic funds, he does not have to actively monitor and rebalance the portfolio based on market movements. The inbuilt auto-allocation mechanism reshuffles the exposure as per the trends. Dynamic funds are a good option for individuals who seek relatively higher returns on investment at lower risk.

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