What are Dynamic Equity Funds?
Mutual funds that dynamically manage their investment portfolio, in accordance with the market sentiment are known as Dynamic Equity Funds. They have a portfolio with a mix of equity and debt securities. These schemes adjust the percentage allocation to equity, in tandem with the performance of stock market indices.
If equity investment looks attractive, then the portfolio is inclined towards equity securities, if not, then it is invested in debt and arbitrage securities.
Benefits of Investing in Dynamic Equity (DE) Funds
- Dynamic Investment Strategy
The most notable benefit is the dynamic investment strategy of these funds. If the market valuations appear expensive, these funds lower down their equity allocation, and invest in debt, whereas, if the markets are inexpensive or fairly valued, these funds increase their equity exposure. This strategy helps in effective risk mitigation, and gets the best out of the investment in two asset classes; equity and debt.
- Low Risk Investment:
Investment in Dynamic Equity Fund carries low risk. Since the portfolio is dynamically managed, with high allocation to equity during undervalued markets, and to debt securities when the markets are expensive, the capital is effectively protected from market risk.
- Diversification:
When it comes to investing, it is recommended to construct your investment portfolio as diverse as possible. A diversified portfolio is the first step to effective risk mitigation. DE funds have an edge over other funds in terms of diversification. They don’t have a specific restriction on equity and debt exposure. With no restrictions, the fund can invest in 100% in equity, or 100% in debt, depending on the market conditions. The strategy of diversification based on the performance of different asset classes, is
- Less sensitive to Market Volatility
Owing to the dynamic nature of these funds, they are less sensitive to market volatility. If the market faces a steep correction, the Net Asset Value of dynamic equity funds which are less inclined towards equities, falls less than its counterparts. This yields stable returns for the investors who are invested for a long period of time in these funds.
However, it should be noted that when other equity funds witness windfall gains because of an unexpected market jump, DE funds may not see an equivalent jump in their NAV, because of low equity exposure.
Who should Invest in Dynamic Equity Funds?
- New investors who are looking to invest in equities, but not bet on risky investments can consider investing in dynamic equity funds, as the inherent risk is quite low.
- Investors who wish to have an access to automatic diversification of asset classes as per the market sentiment, rather than doing it manually can opt for dynamic equity funds. Automated diversification makes these funds a preferred choice for investors who do not have much knowledge of financial markets.
- Investors with a long term investment horizon (5-7) years and low risk appetite should consider investing in Dynamic Equity Funds.
Taxation
- Even though the investment portfolio of dynamic equity funds is diversified as per the market conditions, these funds are eligible for equity taxation. This happens because when the fund lowers its equity exposure, it allocates the resources in arbitrage, to keep the minimum level of 65% holding as equity investment. This is done to keep them under the umbrella of equity funds for taxation purposes.
- Tax on capital gains from dynamic equity funds depend on the holding period of the investment. If the fund units are redeemed before 1 year of investment, the gains are classified as Short Term Capital Gains, and if redeemed after 1 year of investment, they are classified as Long Term Capital Gains.
If an investor has made a capital gain of ₹50000 on investment in an equity fund, Short Term Capital Gains Tax of 15% would be levied if s/he withdraws the amount within one year of investment. The payable tax would be ₹7500. Also, if an investor has made a capital gain of ₹1.5 lakh on investment in an equity fund, and withdraws the amount after 1 year of investment, Long Term Capital Gains Tax of 10% would be levied on ₹50000. ₹1Lakh is exempted from taxation. The payable tax would be ₹5000.