From Debt to Equity

How it works
This one works on the Price to Earnings (PE) ratio of the Sensex. The SIP amount increases when the Sensex is trading at a lower PE compared to the historical PE value and decreases when the current PE value is well above the historical value.

The Pramerica Multiplier is based on the principle of mean reversion in respect of the Sensex PE. The PE mean is calculated taking the weighted average of the average PE of the Sensex over the last five years and the long term average PE of the Sensex since 1991. This PE mean is then compared with the current Sensex PE and based on the variation between the two, the multiplier is determined. The range is between 0 and 4: If the PE variation is 41 per cent and above, then the multiplier is 0; if it is less than -40 per cent, the multiplier is 4. This multiplier determines the amount to be switched.

Here’s how it works for an investor. He will first have to start an SIP in Pramerica Ultra Short Term Bond Fund. Once the investment equals 12x the chosen SIP amount, then the switch can be implemented into the equity fund. On the second business day of every month, an amount will be switched to Pramerica Equity. While the monthly investment in the bond fund would be uniform, the amount switched would vary depending on the Pramerica Multiplier value, which means that the switch amount could vary from 0 to 4x the amount of SIP instalment into the bond fund.

Our view
While the concept is good, it is not too easy to grasp. The good thing is that the investor has no bother at all, he just invests regularly in the bond fund and the investment in the equity fund is automatic.

But is the investment a good one? Pramerica Equity is a large-cap oriented equity fund which has a very short track record in terms of performance. It has only one year of annual performance (2011) where it showed up as a bottom quartile performer.

The bond fund is just over a year old and is a top quartile performer. However, the investor will have to invest a lumpsum to bring it to that required amount or invest via SIPs for a year before he starts the switch.