One Minute Guide | Dynamic fund

One Minute Guide | Dynamic fund

Who am i?

Unlike a typical mutual fund (MF) scheme that either invests in the equity or the debt markets, I invest across equity and debt markets. If my fund manager feels that equity markets are likely to fall, I shift my corpus to debt and behave like a liquid fund. Then, once I feel comfortable with equity market valuations, I move back to equities. Plain-vanilla equity funds must have at least 65% of their corpus in equities, at all times.

Some of my kind stick to a single asset class, mainly debt, and then toggle between debt scrips of varying average maturity periods. IDFC Dynamic Bond Fund (IDB) is such a fund. IDB invests in debt scrips without having any real limit on their average maturity periods. In simple words, it can be a liquid fund today (with debt scrips maturing within 90 days) and a long-term bond fund tomorrow (with debt scrips maturing after more than, say, three years).

How risky am i?

I can get very risky if I come with a freedom to switch between equity and debt, completely. If the fund manager’s assessment turns out to be wrong, I could end up with too much cash or debt scrips and lose out on equity returns. But if my fund manager’s strategy is right, I could also protect my downslide. As a result, most fund managers have internal limits. For instance, ICICI Prudential Dynamic Plan’s internal policies ensure that the scheme is invested up to 65% in equities at all times. Others like Pramerica Dynamic Fund and Franklin Templeton India Dynamic PE Ratio Fund of Funds (FTDP) have pre-set formulas that determine the equity-debt allocation. Beyond that fund managers are free to choose the scrips within these asset classes.

What should you do?

Which formula will work, which won’t, only time can tell. But just like any other MF scheme, look at my long-term performance. For instance, FTDP returned 11.65% in the past five years compared with the category average of 8.89% returned by equity-oriented balanced funds. Not all dynamic funds get their strategy right, so don’t forget to look at their performance.

Remember, while it’s okay for me to switch between equity and debt, there are tax implications. If I remain invested in debt for too long (the average of 12 month-ends of equity-to-debt split is less than 65%), I get classified as a debt fund. In that case, I bring you a higher capital gains tax and also a dividend distribution tax.