VR Logo

Buy Low, Sell High

Funds try to be smart and dynamic, will the payoff work?

How often do you hear the perils of market timing? Now, think of the impact of market timing-it can turn in to an opportunity to make a killing on investments. Fund houses are innovating and coming up with ways to try and make market timing work. The strategy adopted by fund managers is to set conditions that trigger investing decisions and allocations. Two AMCs; Principal Mutual Fund and Pramerica Mutual Fund have launched fund schemes that ride on the premise of shifting between debt and equity allocation based on certain triggers.

The Principal Smart equity fund is an open-ended equity scheme that changes its asset allocation between equity and debt based on the weighted average price to earnings ratio of the NSE Nifty. Normally, for a PE of 16, Principal Smart equity fund will remain 100 per cent invested in equities. With the rise in PE from this level, the fund will reduce the equity exposure and when the PE breaches 28; the fund manager will completely exit equities, turning the fund into a debt scheme. On the other hand, Pramerica Dynamic fund takes into account three parameters-fundamentals, liquidity and volatility to arrive at an optimal debt-equity asset mix. Pramerica Dynamic fund will have its equity exposure in the range of 30 to 100 per cent depending on Pramerica DART (dynamic asset rebalancing tool) score that is generated daily.

Case for investment
One should not go by the performance of the 4 funds that offer similar options (See table: Asset allocation plays) alone. Such funds offer a compelling case to be present in a portfolio at times when the market behaviour calls for restraint and control. By using parameters such PE multiple, liquidity and volatility, there is an automatic and regular change in the fund’s asset allocation which brings in the necessary discipline limiting the fund manager’s discretion. Equity investing calls for a clear objective and discipline, something that such funds offer with their built-in defined triggers. These funds overcome the threat posed by human greed and fear, which sets in irrational buy and sell decisions at the most inappropriate of times. New investors should consider investing in these funds, especially in the current market situation where the discipline to remain invested is important, irrespective of the direction taken by the markets.