Markets were very volatile during 2025, with the Nifty falling below 22,000 in March before recovering and shooting past 26,000 in October. Analysts expect heightened volatility to continue in 2026 as well. Investors can cushion themselves by opting for dynamic asset allocation funds in the coming year.Dynamic asset allocation funds, also known as balanced advantage funds, are hybrid schemes that change their asset mix depending on market conditions. While equity funds delivered flat to negative returns during 2025, the dynamic asset allocation category has managed to give 4.57% average returns. ICICI Prudential Balanced Advantage Fund, the best performing fund in the category, delivered double digit returns (see table). This was possible because unlike balanced funds which maintain a 65% exposure to equity and the rest to debt, dynamic asset allocation funds can invest between zero and 100% in equities. Some funds depend on the fund manager’s ability to read the situation while others follow a rule-based approach. When the market valuation is high, these funds will reduce the exposure to equities and shift to the safety of debt. When markets decline, they will automatically ramp up the allocation to equities while slashing the exposure to debt.Best performing dynamic asset allocation funds
Data as on 18 Dec 2025. Source: Value ResearchNo doubt, this seems like a win-win situation for the investor. However, in reality the mandate of managing asset allocation dynamically can be difficult to follow. Investors can be disappointed if the fund does not time its asset-allocation shifts correctly. Besides, since there is no predefined limit on the minimum allocation requirement of each asset class, the decision of deciding the asset mix is left to the discretion of the fund manager. Therefore, the asset allocation in this category, as also the returns, vary from fund to fund.The choice of funds in this space is critical. In turbulent phases, an asset allocation fund truly serves its purpose if it lets you to keep your cool and gives you the comfort of staying invested even during the tough times. That’s why it is a good idea to look under the hood before you invest. Some funds are more aggressive than others, but experts say it is better to opt for funds that follow a moderate-to-conservative stance. Avoid chasing returns in this category. Funds that lay emphasis on controlling risk are better than those offering an edge in returns.There are also downsides to dynamic asset allocation funds. One, they tend to lose out if the markets continue rising when they have reduced the equity exposure. And two, given that they do not maintain a 65% exposure to equities, these funds do not qualify for the favourable tax treatment enjoyed by equity-oriented funds.
