Rarely in the world of investments do you see great investment opportunities in bonds coinciding with those in stocks. The best investment returns are made by juggling between the two at the right times. But how do you ensure discipline in shifting to debt when yields are good and moving back to equities when earnings are rosy?

How it works DSP BlackRock has adopted a unique strategy to manage asset allocation in its open-ended Dynamic Asset Allocation Fund (DSP BR Dynamic).

It uses the ratio between the yield on the 10-year government security and the earnings yield of the Nifty index — called the yield gap, to make these switches. Earnings yield is the inverse of the price-earnings multiple. It divides the earnings by price to measure what stocks are earning per rupee of investment.

A high yield gap indicates that equities are tending towards being overvalued and that debt is more attractive. DSP BR Dynamic plans to track this yield gap closely to make its equity and debt allocations depending on the gap.

For instance, a yield gap of less than 1.1 will have the fund parking 90 per cent in equities and the balance in debt. A gap between 1.4 and 1.5 will have equal weights of equity and debt. Above a gap of 1.8, equities will have a 10 per cent share with the remaining in debt.

Historical yield gaps over the past five years suggest that allocations will tend more towards debt than equities. While there are a handful of asset allocation funds, barring a few such as Franklin Dynamic PE, most don’t follow an objective strategy to balance allocation. DSP BR Dynamic’s strategy of comparing both equity and debt yields can bring about more timely and accurate re-jigging of asset allocations.

A fund-of-funds DSP BR Dynamic will invest in equity and debt schemes of the fund house. In its equity portion, the fund will primarily invest in DSP BR Top 100 fund and DSP BR Equity. The former, a large-cap fund, has slipped in performance over the past year, falling 2 per cent against the 2 per cent rise in the BSE 100 — its benchmark.

But over the long term, it has a reliable and consistent track record. DSP BR Equity, a multi-cap fund, has similarly faltered. Its track record of consistency is also on the lower side. Other equity funds from the DSP BR stable — Opportunities, Focus 25 and TIGER — may also be invested in.

In the debt segment, the fund will primarily invest in DSP BR Strategic Bond Fund and DSP BR Short Term fund. The former has a longer maturity period, investing in government securities and high-rated corporate debt. A mid-quartile performer, the fund has, nevertheless, marginally beaten its category average across time-frames and interest rate cycles. DSP BR Short Term is also a good performer, and invests in top-rated corporate debt.

Asset-allocation funds suit conservative investors who lack the time or ability to rebalance their portfolios from time to time. Investments have to be made with a long-term time frame.

Issue details Being a fund-of-funds, DSP BR Dynamic is subject to capital gains tax. It also charges exit loads of 1 per cent for redemptions before a year, and 0.5 per cent for redemptions between one and two years.

The fund will be managed by Apoorva Shah (equity) and Dhawal Dalal (debt). The NFO period closes on January 31, after which it is open for continuous sale.

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