The nomenclature of multi-asset and dynamic-asset allocation could sometimes confuse investors. Here’s the difference:
Multi-asset
These funds invest 10% each in a minimum of three asset classes (equity/debt/gold/exchange-traded commodity derivatives). The benefit is that you get to hold a diversified portfolio which helps in reducing volatility. Gold had a stellar run during the pandemic led economic meltdown while equities saw a precipitous drop in March 2020. So investing in such a fund would have helped you participate in the gold rally, with the benefit of protecting your portfolio (to the extent of exposure to equities) through debt allocation during the March 2020 crash in Indian markets. In the same vein, if the fund manager had increased exposure to equities post the market correction in March 2020, the fund would benefit from the rally that we are seeing currently. All asset classes don’t perform similarly during all times so allocation to different assets help.
Dynamic asset allocation
These funds have the flexibility to invest in equity and debt dynamically depending on where fund managers see an opportunity. If the markets are overvalued, the fund manager could rebalance the portfolio by moving towards debt to shield the portfolio from volatility. The major difference between dynamic asset and multi-asset funds is that the former can move in a wider range between equity and debt exposure while the latter tend to follow a more stable allocation. Dynamic asset allocation funds eliminate the need for investors to worry about increasing or decreasing their equity exposure on their own. Do note that the taxation of such funds could change depending on the exposure to debt/equity.
Source: https://www.morningstar.in/posts/61188/multi-asset-dynamic-asset-funds-consider.aspx
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