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Business News/ Money / Calculators/  The formulas of Motilal Oswal’s new equity fund
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The formulas of Motilal Oswal’s new equity fund

Investments are decided by a table based on the index and this removes the fund manager's subjectivity, as is the case with most other dynamic equity funds;the rebalancing will happen once a fortnight

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Motilal Oswal Asset Management Co. Ltd has launched a new scheme that aims to rebalance debt and equity: Motilal Oswal MOSt Focused Dynamic Equity Fund (MDEF).

The fund house has devised an index in-house (but validated and maintained by the India Index Services Ltd; a National Stock Exchange’s subsidiary) that takes into account Nifty 50 index’s Price-Earnings ratio, Price to Book ratio and Dividend Yield. A lower value of this index (called Motilal Oswal Value Index or MOVI) indicates that the market valuations are low and therefore attractive. The fund has already decided its equity and debt exposure at various MOVI levels. Based on this matrix, MDEF will invest in equities and debt, accordingly. In addition to buying equity shares, MDEF will take derivate exposures to a limited extent, to hedge its positions.

What works...

Investments are decided by a table based on the index and this removes the fund manager’s subjectivity, as is the case with most other dynamic equity funds. The rebalancing will happen once a fortnight.

To ensure that it remains an equity fund, the fund will take an equity derivatives exposure as well, to hedge its positions. Combined with a pure-equity exposure, its overall exposure will be at least 65% at all times.

...What doesn’t

The scheme appears to be a contrary to the fund house’s philosophy of ‘buy right sit tight’. The fund manager says that it is aimed at investors with a medium-term horizon.

Though the fund has back-tested this model to 1999, it is difficult to predict markets. Very often, the markets remain persistently high despite high valuations and schemes with high cash calls and/or lower equity exposures have suffered in the medium and long term. Also, bad equity calls can derail a fund like this one, though given the fund house’s track record in equity management, we do not think that is a problem.

Mint Money take

It’s okay to switch between equities and debt depending on market valuations. And if such switches are based on a formula rather than a fund manager’s discretion, it may work out better in most cases. But apart from one such scheme (Franklin India Dynamic PE Ratio Fund of Funds) that comes with an impeccable, long-term track record and is also a part of Mint50 (Mint’s curated list of 50 mutual fund schemes), we usually advise staying away from asset allocation funds as that is adviser’s job and not that of fund managers’.

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Published: 13 Sep 2016, 12:56 PM IST
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