Dynamic asset allocation is an investment strategy where fund managers invest the funds in a mixed bag of asset classes. By investing in various equity and debt securities, fund managers minimise the risk of more volatile funds while ensuring returns. 


Given this, dynamic asset allocation funds generally give you higher returns in a bullish market and security during a downward spiralling market. 


The main aim of such investment diversification is to reduce the risk of an uncertain market. This is why dynamic asset allocation is the best way to ensure your funds do not take a hit during a bear economy or recession. 


Furthermore, investing in this hybrid fund scheme is good for investors who want to diversify their portfolios. 

Working Strategy of Dynamic Asset Allocation Funds

Like other hybrid funds, dynamic asset allocation funds use diversification to counter equity risk. So, with the higher returns of equity funds, you can balance the risk with secure debt securities at lower interest rates.


However, unlike other hybrid funds, these do not have a fixed ratio. So, fund managers can move funds around according to market trends. This way, managers can shift to another instrument when one instrument isn’t performing as expected. 


For example, consider that the fund manager initially invested 65% of funds in equities when the market was bullish. Soon the market shows downward trends, so fund managers can sell these equities and increase the allocation in debt funds from 35% to 55%. 


This is done to reduce risk on equity and park funds until better market conditions. 

Pros of Dynamic Asset Allocation Funds

  • Portfolio Diversification: Not only is investing through dynamic asset allocation ideal for risk-averse investors, it also divisive your portfolio by investing in different instruments at the same time.

  • Risk-Reward Ratio: Dynamic asset allocation has a better ratio for risk and rewards, which gives you a higher potential to earn better returns than debt or equity.

  • Higher Returns: Investors who want to earn higher returns with equity but are not comfortable with the risk can invest in these funds.

  • Better for Long-Term Investment: Park your funds for longer than 5 years to truly get the most out of these funds.

Cons of Dynamic Asset Allocation Funds

  • Cost Heavy: To successfully handle dynamic asset allocation funds, you will require a skilled fund manager, and these usually have higher fees.  

  • High Expense Ratio: The transactional cost of managing these funds is high, so your overall returns may be impacted. 

Taxation on Dynamic Asset Allocation Funds

For debt asset allocation funds, the dividends are added to the net income and taxed as per the income tax rate. For capital gains, the holding period and type of asset determines the tax rate.


If 65% or above of the assets in the fund are equities, then the tax rate is set at 15%, if held for less than 1 year. If the holding period is above 12 months, you will have to pay a flat 10% tax, for earnings above ₹1 Lakh as these are classified as long-term capital gains.


If the equity exposure is less than 65%, debt-oriented taxes apply. Short-term capital gains are taxed at the rate applicable on your income tax slab, and is applicable if you sell before the 3-year mark. After the 3-year mark, 20% tax is applicable and is classified as long-term capital gains. 

Before you invest in such funds, remember to consider your investment goals, horizon, and risk tolerance. Mutual funds with dynamic asset allocation require some amount of experience in investing, and a higher risk appetite. If you meet these criteria, find funds that match your goals on Bajaj Markets. With an online process, you can invest in just a few clicks and start growing your wealth.

FAQs on Dynamic Asset Allocation Funds

What are dynamic asset allocation funds?

Dynamic asset allocation funds are a type of hybrid or balanced funds that invest in a mix of financial assets in equity and debt funds. Unlike other hybrid funds, there is no fixed ratio, and the fund manager has complete domination to allocate assets as they see fit.

Which is the best dynamic allocation fund?

Edelweiss Balanced Advantage Fund, Sundaram Balanced Advantage Fund, and ICICI Prudential Balanced Advantage Fund are notable dynamic asset allocation funds. Some other dynamic asset allocation funds are HDFC Balanced Advantage and Union Balanced Advantage Fund.

Are dynamic asset allocation funds good?

Since the assets are allocated in a variety of instruments across the market, dynamic asset allocation gives you better returns in uncertain market conditions. In addition, it also allows diversification of the portfolio, which makes it a great option. 

What is the taxation rule for dynamic asset allocation funds?

If the equities capital gains exceed 65%, then it is taxed as per the equity tax rates. If it is less than 65%, then the capital gains are taxed under debt fund tax rates.

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