Wouldn’t you love to buy equities when markets are at a low and sell them when markets are at a high?
Dynamic funds switch between different asset classes, depending on their attractiveness. Dynamic funds aim to switch aggressively between equity and debt and are more opportunistic. When an investor invests in dynamic asset allocation funds, s/he does not have to worry about rebalancing the equity and debt allocations.
The fund managers of these funds do it automatically on their behalf. These funds invest in equities and debt. These funds are invested with the help of valuation metric to regulate whether the markets are affluent or low-priced. They hike their equity exposures, when the markets are low-priced and vice versa. Various metrics i.e. price-to-equity ratio (P/E) and price-to-book value (P/BV) used for determining equity exposure. If P/E goes down, the fund will be substantially invested in equities. It will progressively reduce its equity exposure as the market P/E moves up and then invests entirely into fixed- income products. These funds carry certain tax advantages.
As a fund gets treated as an equity fund, hence gets advantageous tax treatment only if its average equity exposure during the year is above 65 per cent. These funds do the asset allocation on the investor’s behalf. They are all- weather funds and investors may invest in them irrespective of market conditions.