I am 32 years married with a daughter and residing in Mysuru. I am impressed by the ads on mutual funds by AMFI and want to invest in equity mutual funds. A friend has advised me to take a look at dynamic equity funds. What are these funds? Are they good to invest?
Equity investors pour more money into the markets when they are going up and stay away during downturns, which can hurt returns. To protect investors from such behavioral bias, there is a category of mutual funds called dynamic equity funds. Dynamic equity funds manage their equity portfolios, by investing more when markets are down and less when they are up. 1.Dynamic equity funds tweak their exposure based on market levels, and contain volatility better than diversified equity funds, which are fully invested across market levels and phases. 2. By reducing equity exposure and increasing cash allocation at appropriate market levels, these funds ensure downside protection. 3. You must note that Dynamic equity funds can underperform in bull runs. Dynamic equity funds have underperformed compared to diversified equity funds over time, as they also tend to time the market. Dynamic equity funds may be suitable if you are conscious of market valuations and are wary of over-valued markets. But diversified equity funds are a better bet, since they are simple to understand and offer higher returns over time.
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