Equity has the potential to create wealth over the long-term.
However, one must have the resilience to survive the ups and downs that come along with the market … to earn these returns.
On the other hand, debt generally provides some amount of predictability in returns, with lower ups and downs. With debt, one is likely to earn moderate returns.
In order to earn good returns and maintain lower volatility, it is important to have a mix of equity and debt in your portfolio.
But what is the right balance of equity and debt?
Thankfully, this is the exact question addressed by dynamic asset allocation funds.
As the name suggests, these funds dynamically allocate money between equity and debt based on a pre-set model that assesses and analyses market conditions.
When the market offers favorable equity valuations (which can provide good returns for the investor) the fund dynamically invests more in equities.
When equity valuations are expensive, the fund reduces equity allocation and increases its capital allocation to debt or arbitrage.
Classic buy low…sell high!
Dynamic asset allocation funds make these allocations based on fundamental valuation indicators such as price/earnings ratios, price/book value, etc.,
and technical indicators such as historical moving averages.
For an investor to keep track of market movements and accordingly rebalance their portfolio manually can be very technical and can get overwhelmingly stressful.
Emotion may also sway an investor. However, dynamic asset allocation funds are immune to emotions in the market. They act solely based on rules and formulas that automatically balance the debt and equity allocations for the fund.
Dynamic asset allocation funds can be compared to driving an automatic car.
When driving on an empty road, at full speed, the car shifts to the highest gear, automatically. Dynamic asset allocation funds automatically shift more funds towards equity when they see that the market has more upside potential.
When driving in traffic, the car’s speed is reduced. The car automatically shifts to second or first gear. Similarly, dynamic asset allocation funds reduce equity allocation and increase debt allocation when market valuations are high.
When the road is clear again, the car will automatically shift into fifth or sixth gear. Dynamic asset allocation funds also increase equity allocation and reduce debt allocation when the market valuations are favorable again (cheaper).
The allocation between equity and debt in these funds depends on the valuation of the broader equity market. This constant rebalancing in dynamic asset allocation funds, aims to generate returns with less volatility in comparison to the broader stock market. Ultimately, giving the investor a better experience with lower ups and downs.
An investor can invest at any point in time in dynamic asset allocation funds, without worrying about maneuvering changing market conditions. An ideal choice for investors who aim to create wealth … with lower volatility.
Dynamic asset allocation funds are structured in a way to take advantage of favorable equity taxation.
Talk to your investment manager to learn more about dynamic asset allocation funds and how they can help smoothen your investment journey while accumulating wealth.
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