Investment Focus - Franklin Dynamic PE Fund: Invest

Wary of investing in equity funds because the Sensex is close to a new high and you have missed the rally? You can still consider FT India Dynamic PE fund. The fund’s unique feature is its ability to dynamically shift its portfolio between equity and debt, based on stock valuations.

This fund-of-funds redirects your money into two good funds from the Franklin Templeton stable – Franklin Bluechip Fund and Templeton Income Plan. FT Dynamic PE Fund pegs its equity-debt mix to the Nifty’s price-earnings multiple. If the Nifty PE is below or equal to 16 times, the fund can invest its entire portfolio in equities. If the PE moves above 16 times, it cuts equity allocation to 50-70 per cent. Should the Nifty PE move beyond 24 times, the fund can shift into debt and out of equities. This translates into selling stocks at highs and buying them on declines.

By end-September, the fund held 75 per cent in Franklin Bluechip and 25 per cent in Templeton India Income Fund. The key argument for investing in the FT Dynamic PE Fund is its ability to keep up with balanced funds during bull phases, while containing losses well during bear phases. Consider its track record. The fund’s one- and five-year returns of 5.7 and 16.3 per cent are on par with the balanced funds category. For three years, its return of 5 per cent is well above both balanced and equity large-cap funds. But where the fund is head and shoulders above competition is in shielding its investors from during market falls. During the 2011 crash, this fund lost just 5 per cent, while balanced funds, on average, lost 16 per cent. Equity funds averaged a 24 per cent loss.

Conservative approach

Both the funds that FT Dynamic PE Fund invests in have an established long-term record. Franklin Bluechip follows a buy-and-hold strategy and avoids going overboard on highly priced stocks. This has meant low weights in sectors such as FMCG and pharma, which has moderated Bluechip’s one-year return. Over the long term, it is a consistently good performer beating its benchmark around 80 per cent of the time.

Templeton Income too, follows a conservative approach, investing primarily in government securities and highly-rated corporate bonds. With its medium-to-long term investments, the fund has been a middle-of-the-road performer in the current rising interest rate scenario. It has, however, done better than its benchmark. Should interest rates correct hereon, the fund’s strategy could pay off. The strategy of both these funds indicates that FT Dynamic PE is suitable for conservative investors with a long-term investment horizon. But do note that FT Dynamic PE Fund does not offer the tax benefits of a pure equity fund. Since it is a fund-of-funds, returns will be subject to both short-term and long-term capital gains tax.

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