Friday, April 17, 2015

Dynamic Mutual Funds

While the mandate allows them to move to 100% debt, most prefer to hold it to 35% to get equity tax benefits

Conventional wisdom says investors should buy into the market during the lows and sell when it's high. In reality, it's always the opposite. But some fund houses are trying to achieve it. ICICI Prudential Dynamic Fund, for example, has the mandate to sell its entire equity portfolio if the fund manager feels the markets are incredibly high and move to debt. And, it can invest the entire corpus in stocks when the valuations are attractive.

Among other fund houses, HSBC Asset Management has a dynamic fund since 2007; IDFC Mutual Fund has one since October last year, and more fund houses such as SBI Mutual Fund recently launched similar schemes.

The question is, should investors buy there? Experts say these schemes focus on protecting the downside associated with equity markets. These funds mainly protect the kind of downfall investors have seen in 2008 due to global financial meltdown by moving into debt. They, however, lag in performance when the market starts rallying as they take time to deploy the funds

There are, therefore, recommended for investors willing to trade volatility with slightly lower returns than the other well- established equity mutual funds. At the same time, they are a better choice over index funds, which give return in line with the benchmark and are fully invested in equity all the time.

It is not an easy task for retail investor to time the market. Either they should opt for a systematic investment plan or invest in dynamic fund. ICICI Prudential Dynamic Fund's one- year return is 31.54 per cent, while S& P BSE Sensex has returned 23.61 per cent. HSBC Dynamic Fund's one- year return stands close to Sensex's 23.50 per cent.

While these funds share the same philosophy, their investing style differs. IDFC Dynamic and SBI MF, for example, follow a quantitative model and the fund manager follows a passive investment strategy. ICICI Pru Dynamic is actively managed. All these funds take exposure to derivatives.

While other big fund houses might not have such a scheme, they have funds- of- funds that do the same. HDFC Dynamic PE Ratio Fund of Funds invests in its own equity and debt schemes and so does Franklin India Dynamic PE Ratio Fund of Funds. They are, however, treated as debt funds for taxation and the investor needs to pay a tax depending on the duration of exit.

If you invest in dynamic equity funds, they might affect asset allocation in different market conditions. If markets crash and these schemes move to fixed- income instrument, the portfolio of investors will get heavy on debt. That's why these schemes should not form the core of the portfolio. Only large- cap schemes should form the core.

Although the fund says it can move heavily into debt in adverse market situation, the fund managers don't drop the equity allocation significantly. We don't intent to bring down equity level below 65 per cent. Investors can enjoy zero long- term capital gains tax if they remain invested for more than a year

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

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