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The Franklin India Dynamic PE Ratio fund, which switches between debt and equity each month on the basis of the Nifty index price-earnings multiple, is a good bet for conservative investors.
The equity component of this fund of funds is the Franklin India Bluechip Fund, while the Franklin India Short Term fund handles the debt component.
What makes the Franklin Dynamic Fund unique is the manner in which allocations are decided. At the two extremes, if the Nifty index PE is below 12 times or above 28 times, 90-100 per cent of the portfolio goes into equity or debt, respectively. When the PE is 12-16 times the trailing earnings, 70 to 90 per cent is invested in equity, and this gradually moves lower as the PE moves higher, to 16-20 times (50 to 70 per cent equity), 20 to 24 times (30 to 50 per cent equity) and 24-28 times (10 to 30 per cent equity). This is effectively shifting to debt at market highs and accumulation of equity at lows.
In the 2011 market slide, for example, Franklin Dynamic PE lost just 5 per cent while balanced funds dropped 16 per cent. If the overheated markets take a breather now, the fund’s 50 per cent allocation to debt will help.
Fund make-upFranklin India Bluechip is a pure large-cap fund and makes no investment in mid- or small-cap stocks as other large-cap funds do.
While this has sent Franklin Bluechip’s returns below the category average and benchmark Sensex intermittently in the past two years, the fund has begun picking up over the past three months. Its five-year return of 13.7 per cent is above the large-cap category average of 11.8 per cent.
The debt fund, Franklin India Short Term Income plan, is ranked in the top quartile of short-term debt funds across timeframes and interest rate cycles. The fund’s current yield to maturity, at 10.7 per cent, is above the category average of 9.2 per cent. While short-term instruments are not the best bet for an interest rate cycle that is trending lower, it also involves lower risk.
Franklin Dynamic is not a chart-topper, but it does a good job of shielding returns from stiff slides. Being a fund of funds, tax treatment is on a par with debt funds and attracts short- and long-term capital gains tax.
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