With the sharp fall in stock markets, fearing a rate hike by the US Federal Reserve, equity market is bringing back the investors’ interest in dynamic equity funds. On the back of weaker global cues that signal an uncertainty on the Dalal Street, market dipped around 1 per cent in the last week, but investors are enjoying their spending spree on dynamic equity funds to get good returns. Amid the market’s cartwheel movements, wealth managers are reportedly pushing these funds, even after the Nifty moved up 30 per cent since February. The price-to-earnings ratio of Nifty is 23.89, a 19 per cent premium to its 10-year historical average of 20.09, which makes many wealth managers advocate a caution.
The wealth managers, however, believe that investors can earn good returns in the long run if they invest in dynamic funds at this time. “The dynamic equity funds allocate less to equities when market valuations appear expensive, and increase allocation to equities when market valuations seem cheap,” said a Mumbai-based wealth manager.
As far the dynamic equity funds are concerned, it automatically rebalances portfolios in some way or the other, making a good fit for first-time equity investors with a low appetite for risk. Fund managers believe that if the market is to enter a corrective mode, dynamic funds with a lower allocation to equities may see lower erosion in their net asset value (NAV) as compared to pure equity funds.
“Over the past few years, we have been advising distributors and investors to look at dynamic asset allocation funds to tide over volatile times. Given the track record of the fund, there has been a sizeable interest from retail investors for dynamically-managed asset allocation funds,” said Manish Gunwani, Deputy CIO (Equity) of ICICI Prudential AMC.
Keeping human emotions aside, dynamic asset allocation funds allow the investors with an option - buying low and selling high. They are structured in such a way that the investors can put in their money in equities when markets are cheap and book profits when markets are rising. The switch between different asset classes can be done daily, monthly or quarterly, depending on the mandate of the fund.
As per data available with the Securities and Exchange Board of India (Sebi), overall deployment of equity funds, especially in bank stocks, stood at Rs 1,05,115 crore at the end of August as against Rs 82,042 in July-end. “In June-end, it stood at Rs 93,885 crore, which was also the previous high figure,” the market regulator said.
However, it has been observed that most of dynamic equity funds give maximum returns around 5-14 per cent in 1-year time and 14-22 per cent in 3 years as well. Such kind of funds uses different parameters to determine the equity allocation in their portfolio. “A commonly-used parameter is the price-book value, which determines a prudent level for entry or exit from equities by evaluating their intrinsic value. The price-to-book value of the equities is available on a daily basis to determine whether market is overvalued or undervalued,” said a fund manager.
“It could therefore be a prudent strategy to add the flavour of dynamic asset allocation funds to your investments as these funds strive to deliver superior returns, while reducing risk by following the principle of asset allocation,” he added.