Dynamic Mutual Funds

Types of Dynamic Mutual Funds

There are 2 categories of dynamic mutual funds, one which dynamically manages its equity securities and the other which allocates investments across asset classes based on market conditions.

The former is known as dynamic equity funds and these funds increase or decrease their exposure to equity securities according to market conditions. The latter is known as dynamic asset allocation funds and they are more flexible in terms of asset allocation as they can even allocate 100% on an asset class depending on their strategy.

Simply put, dynamic equity funds are equity-oriented which means they alter their exposure to equity and cash, depending on the market valuations and other parameters. Dynamic asset allocation funds, on the other hand, switch between asset classes, i.e they increase their exposure to debt assets, money market securities, derivatives, etc., when the equity markets look unstable.

How is a dynamic mutual fund different from a balanced mutual fund?

Many investors tend to confuse dynamic mutual funds with balanced funds which also invest in a mix of debt and equity securities. However, both of these funds differ in many aspects and the differences are as follows:

1. A balanced fund invests in a mix of debt and equity securities wherein the proportion is usually 35% in debt and 65% in equity. In a dynamic fund, the exposure to equity and debt can go up to 100%, depending on the market conditions.
2. Unlike balanced funds, dynamic funds can switch their asset allocation which aids in riding out the market volatility.
3. Dynamic mutual funds are much more flexible as they can juggle between asset classes as compared to balanced funds which have a fixed asset allocation.
4. Balanced funds carry a relatively higher risk than dynamic mutual funds.

Benefits of Investing in Dynamic Mutual Funds

As stated above, dynamic mutual funds can even out the fluctuations in the capital markets to deliver attractive returns to the investor. The other benefits that dynamic mutual funds offer have been listed below:

1. Dynamic mutual funds are less vulnerable to the volatility in the market.
2. Investors need not worry about the varying trends in the market since these funds hedge the risk by transitioning the asset allocations.
3. Since dynamic mutual funds are less volatile, investors can invest in them over the long term and achieve their wealth creation goals.
4. Dynamic funds have the potential to yield optimal returns for investors by adjusting the asset allocations and at the same time, lowering the risk associated with the investments.
5. Investors can reap tax benefits on dynamic mutual funds by holding the units over 1 year. Also, the dividends earned on these funds are tax-free.