Many times broad indices continue to trade at a premium to their long-term average valuations. In such a scenario, financial planners believe dynamic asset allocation or balanced advantage funds which can invest 0-100% of their portfolio in debt or equity are a good bet.

Many times broad indices continue to trade at a premium to their long-term average valuations. In such a scenario, financial planners believe dynamic asset allocation or balanced advantage funds which can invest 0-100% of their portfolio in debt or equity are a good bet.

In line with their mandate to be fully invested and not take any cash calls, most diversified equity mutual funds are fully invested at any given point of time. On the other hand, dynamic asset allocation funds can invest in a mix of debt and equity. They increase/decrease their allocation to equities and debt depending on their view of the stock markets.

Typically when valuations are low, they increase equity in the portfolio, and when they are high, they reduce it. The equity component of the portfolio can go up to 100% or even 0% and would vary depending on the method of calculation used by the fund house. A fund house is free to use its own methodology for calculation this. A fund could use the Nifty PE, price-to-book value or any other in-house developed proprietary models to allocate.

Dynamic allocation funds help in automatic rebalancing of funds and is hence recommended for first time equity investors with a low risk appetite. If the market was to enter a prolonged corrective phase, such funds with a lower allocation to equities could see a lower dip in their net asset value (NAV). However one must note that since, since these funds tend to hold higher debt when equities surge in prolonged rallies as we saw in calendar year 2017, they could underperform diversified equity.

The biggest advantage of these funds is that they are structured in such a way that they are taxed as equity funds for investors. When this fund lowers its equity exposure, it ensures that equity plus arbitrage component of the scheme is at least 65% of the corpus, which helps it, qualifies for equity taxation. Investors will have to pay a 10% long-term capital gains tax if they sell their units after holding for one year. 

In dynamic asset allocation, if the PE ratio of a broader index such as S&P BSE 100 goes above a certain level, the scheme would sell a portion of its equity portfolio and increase the portion of its investment in debt securities. Similarly, when the equity market improves and the PE ratio comes to the pre-defined level, dynamic asset allocation would again increase its exposure to equity instruments and reduce the portion of debt investments. Due to this strategy, these funds are considered to be an excellent investment for volatile times.

One of the key advantages of these funds is that they manage risk very well. To reduce the risk, they invest in different assets such as equity and debt. What makes dynamic asset allocation funds unique from pure debt or equity plans is that they are not mandated to remain invested in a particular asset class, they can actively rebalance their portfolio as per the market scenario.

Funds Masters Recommended Best Low Risk Funds For Year 2019

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It’s proven by behavioral finance experts that fewer scientific choices lead to better decisions. Your portfolio should not have too many or too few funds. Generally 3-5 funds are sufficient for all your financial needs. You need different types of funds for different goals. Equity, Debt and Tax saving.

The Following Low Risk Mutual funds are hand Picket funds for your long term wealth creation and specially for investing in year 2019.