I'd like to restructure my funds' portfolio in anticipation of my retirement, which is just a year or so away. Over the years, I have invested mostly in equity funds, with my current portfolio consisting of Franklin India Bluechip, Templeton India Growth, Franklin Infotech, Franklin Internet Opportunities, Reliance Vision and HDFC Equity. Recently, I have switched some investments to HDFC Prudence. I am now looking for another fund that is suitable for my retirement. What is your opinion of the new asset allocation funds such as Prudential ICICI Dynamic and FT India PE Ratio for this purpose?
As you approach retirement, the need for income increases. This seems to be the case with you and the move towards increasing debt allocation is a sensible step.
Though both Prudential ICICI Dynamic and FT India PE Ratio are asset allocation funds, they are as different as chalk and cheese. Prudential ICICI Dynamic is an actively managed fund. The fund manager has the complete freedom to move the entire portfolio into debt and cash as he sees fit. Investing in this sort of fund obviously means a high degree of faith in the particular fund manager.
FT India PE Ratio on the other hand is passively managed, both in terms of its asset allocation as well as stock selection. This fund actually runs on autopilot. The equity component consists of the S&P CNX Nifty Index while select debt instruments make up the balance. The allocation between equity and debt is pre-decided and is based on the PE ratio of the Nifty index. Re-balancing is done once every month to maintain the asset allocation. The aim of this exercise is to automatically follow a buy low sell high approach. This can be seen from the fact that the equity allocation is higher when the market is more attractively valued. Thus at one extreme the fund will replicate a Nifty index fund, while at the other extreme it will resemble a bond fund.
In most bullish years, the average diversified equity fund in India has outperformed the Nifty. An investor in this fund must, therefore, be satisfied with the lower returns that the index generates (and good diversified funds) in good times. But such performance is designed into this fund, which is meant not to outperform a bullish market but to hold on to good returns across the entire cycle of bull and bear markets.
In 2003, the first full calendar year for both of these funds, Prudential ICICI Dynamic Fund returned 98.47 per cent, while FT India PE Ratio Fund generated 61.30 per cent. Both schemes thus under-performed the average diversified fund, which returned 112 per cent. Prudential ICICI Dynamic, however, outperformed it's benchmark the S&P CNX Nifty, which returned 76.53 per cent. The PE Ratio Fund under-performed the Nifty also, which generated 76 per cent. In the case of the PE Ratio fund, the under-performance is to be expected on account of its debt component. As the market rises, this under-performance could increase. On the brighter side the fund should look better when the market goes through a prolonged slump.
On the whole one year may not be a significant period to judge the performance of a fund. It is thus too premature to take a call on either of these funds. FT India PE Ratio's investment theory can not be judged fairly till it has seen an entire bull and bear cycle and Prudential ICICI Dynamic's track record is just too short to enable an informed judgement.
You could look at a good balanced fund if you wish to keep your equity exposure at 60 per cent. Or, you could target a lower equity allocation through a monthly income plan. Also, a whole range of equity allocations is available through a fund of funds like the FT India Life Stage Plan. This would enable you to retain some of your favourite funds and at the same time keep the asset allocation of your choice.