How do Dynamic Funds Work?
Dynamic Mutual Funds employ an investment strategy known as ‘asset allocation’. Unlike funds that have fixed allocations to different asset classes dynamic funds continuously monitor and modify their asset allocation based on prevailing market conditions and economic indicators. The fund manager makes allocation decisions with the objective of maximizing returns while effectively managing risk.
To make these allocation decisions the fund manager relies on a range of indicators and economic data. These indicators may include market valuations, interest rates, economic growth prospects and inflation expectations.
For instance if the manager predicts a stock market, with growth prospects they might choose to increase the funds investment in stocks. On the hand if the manager foresees a market or an increase, in interest rates they could opt for reducing stock investments and allocating more funds to fixed income or cash instruments.