The Hindu Business Line : Money market instruments fail to lure diversified equity funds

Kolkata, Aug. 7 During the past 18 months or so, diversified equity funds have carried less than 10 per cent average allocation to money market instruments in their portfolios. This is regardless of all the ups and downs that the market has seen during this period.

The average monthly money market component has been quite erratic, peaking during June 2006 or thereabouts and declining drastically before January this year – after which the average figure has clawed back rapidly again.

The 18-month average, as tracked by MFIE and relating to July 16, stands at 9.06 per cent, factoring in a skew in the money market allocation figures chiefly because of “large money market positions taken by NFOs”.

The figure, which was less than 8 per cent in January last year, zoomed to over 11 per cent in mid-2006 before dropping significantly to a little less than 7 per cent in the beginning of the current calendar year. The June figure coincided well with the 18-month average tally.

Analysing the scenario, Mr Mihir Vora of HSBC Mutual Fund noted that the trend pertained to low money market allocations by diversified funds. “Equity funds have at various points of time decided to increase or bring down their allocations to money market instruments in line with the circumstances that prevailed in those points,” he said, while underlining the importance of dynamic fund management.

A fund may well perform if it can limit its downside risk by efficiently shifting gear in favour of money market instruments (and also derivatives), especially when stock prices have advanced too far ahead for comfort or when the general view of the market is turning pessimistic.

Increasing exposure to money market instruments, along with various debt securities, is mostly aimed at limit the downside – a strategy that is also used when there is acute volatility in the market. However, a fund may be in a position to miss out on comparative returns if there is prolonged, excessive dependence on these investments.

Dynamic asset allocation

The fund industry is of the view that dynamic asset allocation should find favour with discerning investors in these volatile circumstances. Products that allow easy shifts from one asset class to another need to be in focus, it is felt.

The universe of so-called ‘dynamic’ funds has not quite grown; only a select few exist, some carrying names like Dynamic, Variable, Investment Opportunities and so on. Their returns, nevertheless, have varied widely.

UTI Variable Opportunities, which has given 13 per cent in a year according to Value Research, tries to manage its equity and debt allocations in a way that provides reasonable returns, courtesy a combination of passive and active strategies. Investments in debt are in AA and above rated papers.

DWS Investment Opportunities, with a higher 56 per cent to its credit, has a simpler policy of eyeing long-term appreciation by active investment in various asset classes in line with market conditions.

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