This type of fund changes its allocation to equities and debt depending on market valuations, raising it when markets are down and lowering it as markets move up. The new fund will use an in-house valuation parameter, the Motilal Oswal Value Index, an equal-weighted index created using the price-to-earnings ratio, price to book value ratio, and dividend yield of the Nifty.
The fund's allocation to equities can range from 30 to 100 per cent; debt allocation from zero to 35 per cent; and allocation to equity derivatives from zero to 35 per cent. Since the fund will never have an equity allocation (equity and derivatives combined) below 65 per cent , it will enjoy the favourable tax treatment that pure equity funds do.
The fund will follow a focused (relatively concentrated portfolio) strategy, as the AMC’s other equity funds do. Selection of stocks will be bottom-up and across market caps. The fund manager will follow a buy-and-hold strategy. He will focus on picking quality businesses that enjoy an enduring competitive advantage and are available at reasonable valuations.
Says Taher Badshah, senior vice-president and co-head (equities) at Motilal Oswal AMC, who will manage this fund: “Investors can put their money in it without worrying about market levels. They will also not have to bother about rebalancing, which the fund will do on their behalf.”
The AMC’s focused approach has its pros and cons. “While a focused approach can deliver high returns when the bets work well, the converse also holds true,” says Bala. This approach has served the AMC well so far. The fund house’s diversified equity funds have a sound track record, although not a very long one as the fund house was started in May 2013.
Dynamic equity funds are suited for conservative investors. “Those who have been investing in fixed-income instruments but now want a taste of equities, could invest in dynamic equity funds,” says Himanshu Dani, founder, Invest Search. Some of the funds in this category with a long and sound track record are ICICI Prudential Dynamic, Invesco India Dynamic Equity, Tata Equity PE and Franklin India Dynamic Equity PE Ratio Fund of Funds. One-year returns of these funds range from 10.96 to 26.36 per cent; three-year returns range from 15.07 to 32.79 per cent; and five-year returns are 11.52-19.12 per cent. Only those prepared to invest across one whole market cycle (up and down) should invest in this category. Give Motilal's new fund some time to build a track record before you invest in it.
PROS & CONS OF A DYNAMIC EQUITY FUND
These funds reduce equity exposure as markets move up, increase it when markets fall
Take emotions like greed and fear out of investing
- Give investors a smoother ride