What are Dynamic Mutual Fund SIP?
What is Dynamic mutual fund?
Dynamic mutual funds, as the name suggests, represents a combination of assets and also the additional benefit of timing. One can argue that mutual funds are all about the long term and therefore the timing should not matter a lot. But in a highly volatile environment the timing can matter in equities, at least in the short to medium term. Secondly, when we talk about dynamic funds, we do not just refer to equity funds but also to debt funds. When it comes to debt funds, the only way fund managers can earn alpha is by taking a view on interest rates or by taking a risk on credit quality.
Let us understand the aspect of dynamic mutual funds with specific respect to sub-categories of mutual funds.
What is Dynamic equity mutual fund?
In popular parlance, dynamic funds are also referred to as opportunity funds. That is because the entire concept of dynamic funds is based on identifying and making the best of opportunities. Conceptually, there are various sub-categories within equities and include mid-caps, large caps, small caps, high growth, deep value, sector-specific, thematic etc. The dynamic fund uses its dynamic nature to shift portfolio allocation between these various categories so that the fund can get the best of periodic outperformance by these specific themes. We have seen in the past that specific themes tend to outperform at different points of time and the dynamic fund manager has the flexibility to shift the asset allocation according. The challenge, of course, is to handle the cost of churning and that needs to be kept as low as possible.
What is Dynamic debt mutual fund?
Theoretically, most debt funds do have a mix of government debt, private debt, short-term debt and long-term debt. The difference in a dynamic debt fund is that these respective shares can be aggressively high. For example, if the view of the fund manager is that the RBI is going to cut rates then the fund manager may aggressively shift his portfolio in favor of high duration bonds. They will tend to benefit more in capital appreciation in the even to of a fall in rates. Similarly, the fund manager may go down the credit risk curve a little more aggressively in an economic upturn as the risks of lower rated funds automatically tend to get mitigated. Also, fund managers of dynamic debt funds have the flexibility to shift between short end and long end of the yield curve as well as between fixed rate and variable rate to make the best of opportunities.
What is Dynamic asset allocation fund?
These dynamic asset allocation funds come with a lot of flexibility in shifting between equity and debt as the principal asset class. Theoretically, the dynamic funds can vary their equity and debt components from 0% to 100% but normally the ranges are more tightly defined. For example, the effort will be to keep the equity component above 65% to get the benefit of equity tax treatment of capital gains. So, Equity would vary from 70-100% and debt may range from 0-30%. Many of these dynamic asset allocation funds have also tried to position themselves as alternatives to financial planning. However, you need to be cautious here and know the difference. Firstly, a dynamic asset allocation fund is an off-the-shelf product based on some basic rules and guidelines. It is not a solution customized for you. Secondly, your financial plan has to be unique to your return and risk matrix and hence these funds cannot be a substitute for your financial plan.
The concept of dynamic funds is interesting and should mature more in the coming years. For the time being, investors are not able to seen any perceptible advantage in opting for these over balanced funds.
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