What is Dynamic Fund?

The market is volatile! As an investor, it can be challenging to keep track of constantly changing market trends, and maximize profit and limit losses accordingly. This is where dynamic mutual funds come in.Like balanced funds, dynamic funds make use of both equity and debt. However, these mutual funds are extremely flexible and dynamic in terms of their asset allocation; so the proportion of debt vs. equity may vary in the ratio.

Dynamic funds have been designed to weather market volatility and can switch between equity and debt, depending on market conditions. This quick, dynamic shifting enables you to cash in on the profit and cut losses at the right time.The exposure of dynamic mutual funds can even go up to 100% equity or 100% debt, taking into account the rising and falling market scenarios, and the fund manager’s decision. Their objective is to provide optimal returns in both cases.

• The right mix of debt and equity Dynamic mutual funds offer an optimal blend of both debt and equity. Since it effortlessly shuffles between asset classes, you need not worry in times of market fluctuations. Moreover, the auto-allocation lets you maintain the most suitable debt-equity ratio according to market trends and helps you balance your investment portfolio in the long run.
• Easy Exit Investors need not worry about exit loads as dynamic mutual funds, unlike other equity-linked schemes, don’t entail a lock-in period.
• Tax-free returns Considering dynamic funds enjoy up to 65% equity exposure, their returns are taxed similar to other equity-linked funds. Investors can avail tax benefits on these funds, provided that the holding period exceeds one year. However, they will be taxed should the returns exceed Rs. 1lakh.Also, should you liquidate your investment within a year; the returns will qualify as short term capital gains and will be taxed accordingly.
• Low risk Most dynamic funds enjoy significant debt exposure during market peaks, and that is what makes these funds comparatively less volatile. Dynamic funds are particularly suited for conservative investors with a low risk appetite. Also, if you are making your debut in the market, dynamic mutual fund is the right option for you.

Further, opting for a Systematic Investment Plan (SIP) can help to negate interest rate volatility.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.