Dynamic Equity Funds are the ones that allocate less to equities when market valuations seem expensive and increase allocation to equities when market valuations look cheap.
How Do Dynamic Equity Funds work?
These funds have a mix of debt and equity in their portfolio. The equity component in such funds varies from 30% to 70-80%, and at times even goes up to 100%.
Why should one invest in Dynamic Equity Funds?
• With these funds, one does not need to worry to time the markets as these have built-in profit booking at higher equity valuation.
• These funds offer high risk-adjusted returns as they limit the downside in volatile markets.
• When the markets fall, dynamic funds see a lower erosion in their net asset value (NAV) as compared to a pure equity fund.
Who should invest in Dynamic Equity Funds?
Ideally, first-time investors with a low-risk appetite should invest in these funds.
Taxation and Dynamic Equity Funds?
These funds are taxed as equity funds for investors. When the fund lowers its exposure to equities, it ensures that the equity plus arbitrage component of the scheme is at least 65% of the corpus, which helps it qualify for equity taxation.
Dynamic equity funds tend to hold higher cash during the time of rising markets, they may underperform during strong market conditions but they are capable of automatically rebalancing portfolios.