Published Article Details

Which is better, balanced or dynamic asset allocation fund?

Posted by: Arti Bhargava on Jan 23, 2017, 01.33 PM IST

Gayatri is nearing 40 and hasn't saved to build a corpus for her son's higher education. She will need the money in another seven years. When it comes to investments, she only has her PPF account, a couple of bank deposits and some equity stocks, which were a gift from her father.

To ease her initiation into mutual fund investing, her adviser has suggested a balanced fund to her, while her friend recommends a dynamic asset allocation (DAA) fund. Gayatri doesn't know much about these funds. To her, they seem similar, since they invest in debt and equity based on market conditions. Which of the two should she choose?

To begin with, Gayatri must understand that balanced funds and DAA funds differ in their approach to juggling proportions. While balanced funds maintain a steady exposure to equity and debt (a minimum of 65% and maximum of 80% allocation to equity), DAA funds are much more flexible. They can invest between zero and 100% in either equity or debt.

Simply put, a DAA fund can become a 100% equity fund if equity is expected to do well. So, how do DAA funds take such calls? These decisions are not based on the fund manager's personal assessment, but on a technical formula. Therefore, this strategy brings discipline to the way the portfolio is managed by the fund manager.

Gayatri should opt for this fund if she wants to ensure that it 'buys equity at lower levels and books profit at higher prices', no matter what the market sentiment or fund manager's view is. Her returns are unlikely to show any wild movement. However, Gayatri must be aware of the fact that this sort of aggressive rebalancing sometimes acts as a handicap for returns.

DAA funds are likely to underperform during a bull phase in the market. As the equity market rises, these funds might book profits and invest more in debt, losing out on a sustained equity market rally. These funds would be ideal for when she nears her goal (say five or six years down the line), as they will protect her gains in the equity market and keep the volatility low.

However, DAA funds fall short on the tax efficiency front. Balanced funds typically maintain a 65% exposure to equities, and qualify for better tax treatment compared to dynamic funds. DAA are much more flexible, but they are also more conservative. If she opts for one, Gayatri must be prepared for a trade-off between risk and return along with a higher tax outgo.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.) This article appeared in Economic Times dated Jan 23, 2017, 01.33 PM IST

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