Investors can sell their entire equity and move to debt when stocks get expensive
ICICI Prudential Dynamic Fund, for example, has the mandate to go up to 100 per cent in debt if the fund manager feels that equity market is too expensive. And it can invest the entire corpus in stocks when the valuations are attractive.
The fund came to limelight in 2011 (though launched way back in 2002) when the market was volatile and it outdid its peers. Among equity schemes, it has one of the highest assets under management (AUM) of Rs 6,000 crore (Rs 60 billion).
Among other fund houses HSBC Asset Management has a dynamic fund since 2007; IDFC Mutual Fund has one since October last year, and SBI Mutual Fund launched a dynamic fund in March this year.
“These funds aim to sell when the market is at the peak and buy when it’s low. They mainly protect the kind of downfall that investors saw in 2008 due to global financial meltdown. They, however, lag In performance when market starts rallying,” said Vidya Bala, head of Mutual Fund Research, FundsIndia. They are therefore recommended for investors who are willing to trade volatility with slightly lower returns than the other well-established equity mutual funds.
At the same time they are a better choice over index funds, which give returns in line with the benchmark and are fully invested in equity all the time.
ICICI Prudential Dynamic Fund’s one-year return is 31.54 per cent while the category (large & mid cap) average is 42.67 per cent and S&P BSE Sensex has returned 23.61 per cent. HSBC Dynamic Fund’s one-year return stands close to Sensex’s at 23.50 per cent.
While these funds share the same philosophy, the investing style differs. IDFC Dynamic Fund, for example, follows a quantitative model and the fund manager follows a passive investment strategy. ICICI Pru Dynamic is actively managed. Newly-launched SBHI’s fund has a model based on market momentum. All these funds take exposure to derivatives.
While other big fund houses may not have such a scheme, they have funds-of-funds that do the same. HDFC Dynamic PE Ratio Fund of Funds invests in its own scheme such as HDFC Top 200 Direct, HDFC Mid-Cap Opportunities Fund and HDFC High Interest Dynamic. Similarly, Franklin India Dynamic PE Ratio Fund of Funds invests in equity and debt scheme to achieve the same result. They are, however, treated as debt funds for taxation and the investor needs to pay a tax depending on the duration of exit.
If you invest in dynamic equity funds, they may affect asset allocation in different market conditions. For example, if the markets crash and these schemes move to fixed income instrument, the portfolio of investors will get heavy on debt. “That’s why investors should not hold these funds as the core in their portfolio along with other large-cap schemes,” said Bala.
Investments in these schemes are classified as equity and don’t attract long term capital gains tax. Though they can heavily move to debt for some time, fund managers always maintain at least 65 per cent of their investments in domestic stocks for this specific purpose.