Dynamic Asset allocation – All You need to know

Dynamic asset allocation strategy is a portfolio management strategy that frequently adjusts the asset mix based on market conditions.
In addition, generally decreasing positions in the worst-performing asset and increasing the positions in the best-performing asset.
How dynamic asset allocation will work?…
In general, this strategy will respond to the current risks of downturns and take advantage of trends to achieve returns that exceed a benchmark, such as Nifty 50.
In addition, there is no fixed asset allocation by the fund manager in this strategy.
Moreover, the portfolio manager changes the asset allocation dynamically.
And the success of this strategy depends on the portfolio manager’s investment decisions at the right time.
Dynamic asset allocation example…
Suppose the global equitities enter into a bear market, and a correction of 30% is around the corner.
Then the manager will decrease equity exposure and will increase fixed income.
Again, once the construction is over and the economy is about to recover, the manager will decrease the fixed income and invest in the bullish stocks.
Advantages of Dynamic Asset Allocation…
Performance…
Investing in the best-performing asset class will make sure the investor’s portfolio has momentum stocks.
And it will boost the returns if the trend continues further.
In addition, in this strategy, the assets that are declining will have low exposure.
As a result of this, the losses will be minimised.
Diversification…
This strategy aims to invest in multiple assets.
As a result of this, the risk will be reduced significantly.
In addition, the portfolio manager may consider investing in assets like gold, equity, bonds, mutual funds, currency, etc.
Finally, top-performing asset will offset the underperforming asset if the fund manager makes a bad call.
Limitations of Dynamic Asset Allocation…
Ative Management..
Actively managing portfolios demands time and resources.
In addition, investment managers need to be up to date with macro- and company-specific news.
Moreover, an additional research analysis team may be required to be hired to help in the research.
Transaction Costs…
In this strategy, buying and selling of assets will happen very frequently.
As a result of this, the transaction costs in this strategy will be high.
Which will effect the returns generated from this strategy.
Finally, if most of the stocks are trending higher, then the constant weight asset allocation strategy may outperform the dynamic asset allocation strategy due to fewer transaction costs.
Read the article about 6 Asset Allocation Strategies.
Also read about asset allocation and its importance.
And read about Tactical Asset Allocation—All You Need to Know…
Also read about Strategic Asset Allocation: All You Need to Know…
And read about Nifty 50 investment: What is the best time to buy and sell?