Investors looking to tactically manage their asset allocation across equities and debt can consider adding exposure to Franklin Templeton India Dynamic PE Ratio FoF. The scheme dynamically changes its asset allocation between equities and debt, based on the weighted average price-earnings ratio (PE ratio) of the NSE Nifty Index.
While at higher PE levels, it reduces the allocation to equities and minimises downside risk, it increases the equity allocation at lower PE levels to capitalise on their upside potential. Such deliberated asset moves have helped the fund contain downsides better than pure-play equity funds and deliver better than debt funds during protracted rallies.
The FoF invests in Franklin India Bluechip, an open-end diversified equity scheme that invests predominantly in large-cap stocks, and Templeton India Income Fund, an open-end income scheme which invests in government securities, PSU bonds and corporate debt. The proportion invested in these funds is decided each month by the PE ratio of the Nifty Index. For instance, while the fund hiked its equity allocation to 91% in March 2009, when the Nifty had hit a new low, it changed the allocation to a 50:50 mix in September that year, by when the PE multiple of the bellwether index had edged over 20 times. Crisil Balanced index and Sensex are its benchmarks.
Performance: This FoF has returned about 15 per cent last year. This is lower than the 22% category average recorded by large-cap equity funds and significantly higher than the 5% average returns of income funds. Over a longer time-frame however, the scheme has beaten both equity and income funds. On a three- and five-year annualised returns basis, it has scored higher or just about in line with that of equity as well as income funds.
For instance, it has delivered a 19% annualised return over the past five years, which is just a shade below the category average (20%) for large-cap equity funds. Much of this can be credited to the scheme`s dynamic asset allocation moves across market cycles. While it allocates over 90% of its portfolio to the Bluechip Fund (the rest to the Income Fund) if the Nifty`s PE falls below 12, it shifts completely in favour of income funds if the index PE ratio moves above 28.
Its asset moves also explain why the scheme`s one-year returns have lagged balanced funds, which follow a fixed asset allocation (65:35 equity-debt mix) across market cycles. It has, nonetheless, comfortably beaten them over longer time periods.
The fund`s performance during periods of market correction merits special note. In the bear market of 2008, its NAV fell by just about 26%, against the 56% decline averaged by diversified equity funds. With the Nifty PE multiple now hovering above 25 times, the scheme`s allocation to equity (through Bluechip Fund) has been cut to 30%.
Suitability: Though the fund has delivered better than most equity funds in the long run, it tends to lag them during periods of protracted market rallies. Tactical asset moves apart, the limited choice of in-house funds too might have restricted its returns - both these funds are consistent but middle-of-the-road performers.
These factors, put together, make the FoF more suitable for investors looking for consistent returns with limited downside risks. It can also be viewed as a good addition to a portfolio of equity funds.
Conclusion
Typical bond funds expose investors to price risk while direct bond exposure does not, if bonds are held till maturity. The positive side to bond fund exposure is that active management can generate higher returns. But there is risk of underperformance. Investors have to consider the associated risks, especially changes in monetary policy, before buying bond funds.
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