Dynamic funds help MF investors beat volatility

With uncertainty on economic growth looming large and the wait for cut in lending rate getting longer, mutual fund investors are betting big on balanced and dynamic equity funds to protect their investment from volatility in the equity market.

Moreover, most of these funds have gained investors’ attention as they have delivered better returns in the recent past.

Manish Gunwani, Deputy Chief Investment Officer (Equity), ICICI Prudential AMC, said the fund house has been advising distributors and investors to consider dynamic asset allocation funds to tide over volatile times.

Given the track record of the fund, there has been a sizeable interest from retail investors for dynamically managed asset allocation funds.

Equity market valuations have turned expensive after the recent sharp run-up in stock prices and no clear sign of pick-up in economic activity. Global investment bank Credit Suisse recently placed Indian markets among the top four ‘expensive' club along with the Philippines, Indonesia and Malaysia. The benchmark Sensex has gained 5 per cent in the last four months.

Prateek Pant, Head – Products and Solutions, Sanctum Wealth Management, said that in times of uncertainty the balanced and dynamic funds work well for investors as they typically invest 65 per cent in equity and the rest in fixed income.

“What has really worked well for these funds is that they have managed to get better returns from equity as well as fixed income. Bond returns in a few cases have matched that of large-cap equity fund,” he said.

In a falling equity market, dynamic funds will lower allocation to equities and could see lower erosion in their net asset value compared with pure equity funds. They are structured in a way to invest in equities when markets are cheap and book profits when markets are rising.

Some of the fund houses also switch asset class according to market conditions. For instance, ICICI Prudential Balanced Advantage Fund rebalances assets on a daily basis with about 30 per cent of its portfolio in equities when prices are expensive and over 80 per cent when prices are attractive.

Fund houses use ‘price-to-book-value’ to determine the right level to enter and exit equity investment.

Dynamic asset allocation funds track the price-to-book-value daily to determine the optimum portion of equities in their portfolio, and accordingly rebalance their assets.

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