The otherwise tedious task of best timing your investment in debt and equity is well taken over by dynamic equity funds which based on the attractiveness of the market take position in the two asset classes. Different valuation parameters are used for adjudging the choice of the asset.
Asset allocation pattern:
In the typical case, rising market scenario relates to more debt exposure and in the other situation, when markets are on the downside, more of exposure is taken in the equity class.
Balance in equity and debt determined using a formula:
Any of the model can be used by the fund house to determine the balance in equity or debt, say for instance a fund house can based its decision on price to book value, Nifty PE or other such metric.
Also automatic rebalancing of the portfolio in case of correction makes the asset class attractive. There is also a provision to switch upto 100% of the funds corpus to debt or money market instruments when the fund manager has a highly bearish view on the market to cap the downside risk.
With more aggressive switch between the asset classes, based on the market dynamics, a dynamic equity fund performs lower in the rising market scenario against a pure or diversified equity fund category. Also, when the market sees a period of prolonged bull markets, lower volatility due to a mix of debt and equity provides lower gains.
Dynamic equity funds portfolio is maintained in a way such that it qualifies for tax treatment similar to equity fund. Also, it is to be noted that beginning the new financial year, these funds category will attract a 10% LTCG tax if units are sold after a holding period of one year.
Suitable for first-time equity investors:
First time equity investors haven't until now the experienced the high volatility of equity markets and such that huge falls do not make them lose enormous money, dynamic funds can be the best bet for shielding against downswings.
The current stock market situation when the market is still overvalued and the corporate earnings are still to pick up, experts suggest investment in these equity funds in comparison to other diversified or hybrid fund category.
As in the diversified fund category, entire position can be taken in the stocks with no cash call while in the hybrid fund class, it is more centered around one asset class category for instance more equity exposure in which aggressive shift as per the market dynamics is not made as in the case of dynamic funds.