Define Dynamic Fund
Dynamic Fund is a kind of mutual fund but with a difference. In mutual fund, the money of investors is invested either in equity market or date market whereas in dynamic fund, amount is invested in both equity market and date market. If fund manager feels that equity is getting more returns then he can invest money in both equity market as well as date market. Similarly, if he feels that equity is getting losses and market is turning bear market, then he can invest in date market instead of equity.
Some funds act like equity fund. Such funds should invest at least 65% amount in equity. Some funds in dynamic fund invest mainly in date fund. But at the time of investment, these funds consider the maturity period of bond, i.e. which fund has higher maturity period and which fund has lower maturity period. Investment is made in the bonds with less maturity period and higher returns. Market has many funds on the basis of maturity period. Some funds are matured soon while others take high time in maturity.
Limitations of dynamic fund
The main drawback of dynamic fund is that if a fund manager invests at a single place arbitrarily, then there is a complete risk of huge losses. Suppose, a manager has invested the full amount of investment in date market and the market becomes bear, then there is a high risk of losses. Thus an investment limit has been decided to avoid such situations. For example, ICICI Prudential Fund has made an arrangement that its share cannot exceed 65% in equity market. Similarly, other dynamic funds have also determined such investment limit. This reduces the risk of possible losses due to investment at a single place.
How to invest in dynamic fund in a profitable way
It is true that since money is invested in both markets in dynamic fund, so the risk is lower and returns are smarter in this fund but still we can't call it best and secured from risks. The best way to invest in dynamic fund is to consider the performance of fund before making investment, although the performance of dynamic fund is generally better than other funds.
In last 5 years, the return of FTPD (one of dynamic funds) has been 11.65% whereas return of categorized fund has been 8.89%. But still, we advice you to invest in any fund according to your planning and requirements. Also see that what probability of expected return from a fund is. Investment security must always be the first priority of any investor.