When investing, instinct often urges us to put more money into shares after markets have run up and withdraw it when markets tumble. Yet the best investment results are achieved by doing exactly the opposite of this. For investors who want to avoid such mistiming, the Franklin Templeton Dynamic PE ratio Fund is an ideal investment. Units in the Growth Plan trade at a current net asset value of Rs 46 per unit.
The fund’s investment strategy is unique. Its portfolio is invested in a mix of equity and debt. But unlike the usual balanced fund, it changes this mix based on market levels (the price-earnings multiple of Nifty) at the end of each month. If the Nifty PE is at a rock-bottom 12 times or less, 90-100 per cent of the portfolio goes into shares, with very little in debt. If the PE crosses the danger zone above 28 times, the portfolio is fully switched into debt. At PE bands that fall in between, the equity portion can vary from 30-70 per cent. In January 2013, the fund had 60 per cent in equities and 40 per cent in debt.
This fund does not invest directly in stocks or bonds, but redirects your money into two other well-managed funds – Franklin India Bluechip Fund and Templeton India Income Fund, the former invested in large-cap stocks and the latter in long term gilts and bonds.
Apart from its emotion-free approach to asset allocation, there are three compelling reasons to invest in this fund now:
The fund’s five-year and three-year returns compare quite well to balanced funds. They stand at 8.3 and 8.8 per cent respectively, compared to 5 per cent and 8.5 per cent for balanced funds. Returns in the last one year were 10.6 per cent. Essentially, that translates into similar or better returns for lower risk.
The focus on blue-chip stocks may help the fund contain losses if the markets were to correct after the recent rally. FT Dynamic PE fund has proved very adept at containing losses during market corrections in the past. In 2008, when balanced funds plunged by 42 per cent in value, its losses were at 25 per cent. Again in 2011, the fund’s losses were at 5.6 per cent even as balanced funds lost 15 per cent.
Modest returns from the Templeton India Income Fund have been a drag on this fund’s performance in recent years. This is because the fund’s strategy of investing in medium-to-long-term bonds has yielded poor returns in a rising interest rate scenario. With interest rates set to decline over the next one-two years, price gains on bonds may perk up debt returns.
The only flip side to investing in this fund is higher tax incidence as compared to balanced or equity funds. Due to its ‘fund of funds’ structure, this fund suffers short-term capital gains tax at the income-tax rate and long-term tax at 10 per cent. But as that is more than made up by the fund’s benefits, this should not be a deterrent to long-term investors.