It is always advisable to distribute your investments between equity and debt, and rebalance your portfolio every year to maintain the ratio. While the importance of asset allocation can never be overestimated, it is an exercise that needs to be done by the investor himself, depending on his personal needs. Having said that, there are funds where the fund manager attempts to do so. Let’s take a look at two schemes. Depending on the state of the market, the fund manager will take a call on whether to increase his exposure to equity or debt. The next step will be looking at where the money is going. Will it go directly into equity, or will it be a Fund of Fund (FoF) where it goes into other schemes? And if yes, then what is the investment universe?
FT India Dynamic PE Ratio FOF
What’s good about this fund: The fund clearly adheres to its strategy. If the PE of the Nifty falls below 12, the fund will be fully invested in equity.
If the PE rises to above 28, it will translate into it being fully invested in debt. The equity allocation was 61.23% on 31 March 2006 and rose to 65.85% on 30 September 2006. During this time, the average PE of the Nifty was 18 and it was in the range of 14.92-21.28. From there on, the market improved and the PE went up. On 30 September 2007, the fund reduced its equity allocation to nearly 50% when the Nifty was around 22.
In doing so, the fund has clearly attained its objective of downside protection during a market downturn. While the Sensex lost nearly 50% (8 January-10 October), it lost just 24%.
What’s not good: In a rising market, as the equity exposure gets reduced, the investor may have to compromise on returns. As a result, in the 2007 rally, it delivered only 33% against the Sensex’s return of nearly 60%. Its options are limited to just Franklin India Bluechip Fund, an open-end diversified equity scheme, and Templeton India Income Fund, an open-end income fund. Ensure that you are happy with the performance of these two schemes before you consider the Dynamic PE Ratio FoF.
ING Optimix Asset Allocator Multi-Manager FoF
What’s good about this fund: This fund, too, does its asset
allocation based on the PE levels of the market. But it uses an in-house tool called the limited loss moving average (LLMA) to identify changes in market direction. The fund has protected the downside risk and delivered decent returns in upswings. It has curtailed its fall to nearly 23% so far this year (8 January–10 October).
What’s not good: The fund has not always cut on equities at high PE levels. It has generally maintained a high equity allocation during market upswings and high PE levels and has cut the allocation as and when the market has slipped. Since its launch in July 2006 till the meltdown in January, the fund’s portfolio has had an equity component of above 90%.