Prajna Capital

Posted: 03 Sep 2016 06:41 AM PDT

Invest Dynamic Funds Online

Both dynamic and balanced funds determine their exposure to equity and debt asset classes based on market conditions, but balanced funds are tax-efficient and have a better long-term track record.

A mid high market volatility last year, investors took refuge in balanced funds. Net inflows into balanced funds, which in vest in a mix of equity and debt instruments, more than doubled to `19,743 crore in 2015-16. Steady returns and equity fund-like tax treatment have made them popular. But their more sophisticated cousins, the dynamic asset allocation funds, which have performed better over the past year, haven't got the same attention.

Here's why:

While both balanced and dynamic funds follow an asset allocation approach -- investing in debt and equity based on market conditions--they differ in their approach to juggling the asset mix. While balanced funds maintain a steady exposure to equity and debt, dynamic asset allocation funds switch aggressively. They can invest between zero and 100% in equity, depending on the market situation. The degree of flexibility is much wider in dynamic asset allocation. Balanced funds typically invest at least 65% of their corpus in equity, and the rest in debt. The equity portion varies between 65% and 75%.

The good and the bad

While both the categories attempt to contain volatility in returns, dynamic asset allocation funds score over balanced funds in this respect. Across different time frames, they have exhibited a lower standard deviation (around 0.4%)--a measure of volatility in a fund's return. So, even though balanced funds have delivered better returns over longer time frames, these have come at a slightly higher risk--standard deviation of over 0.7%--compared to dynamic funds.

What also works in favour of dynamic funds is they do away with the need to actively monitor and rebalance the portfolio. With rising equity market valuations, these funds will invest a larger portion of the corpus in debt and cash while cutting down on equities. Declining market valuations will automatically trigger ramp up in allocation to equities while slashing exposure to debt. Dynamic funds are beneficial to those who do not have the stomach for timing the market.Since the fund does the rebalancing automatically, they do not have to worry about where to put their money.

Dynamic asset allocation funds, however, fall short on tax efficiency. Equity-oriented balanced funds typically maintain a 65% exposure to equities, and qualify for better tax treatment compared with dynamic funds. Gains realised after one year are tax-free for the investor, even the debt portion incurs no tax. However, most dynamic asset allocation funds follow the Fund of Funds structure--where the fund invests in other equity and debt funds--so are taxed as non-equity funds, irrespective of their level of exposure to equities. For other schemes, which invest directly in stocks and bonds, the taxation depends on the average level of exposure to equities during the year. If at the time of exiting the scheme, it has maintained, on an average, 65% of its corpus in equities for that particular year, the scheme is treated as an equity fund for taxation purpose. Otherwise, any realised gains are taxed along the lines of a debt fund, making the scheme tax inefficient.

Another problem with dynamic funds is that their investing models are not alike. The different approaches may be difficult to understand. While most switch between equity and debt, based on the relative valuation of the two segments, they use different metrics to gauge the extent to which markets are underor over-valued. For instance, Franklin India Dynamic PE Ratio and Principal Smart Equity decides allocation based on the PE multiple of the underlying index, ICICI Prudential Dynamic Fund goes by the Nifty's price-to-book value and DSP BlackRock Dynamic Asset Allocation Fund considers the 10-year government bond yield over earn ings yield of the Nifty.

Dynamic Funds or Balanced Funds

Given their flexible structure, dynamic asset allocation funds should be best suited to capture market opportunities, but the aggressive rebalancing sometimes acts as a handicap for the funds as they cannot capture the market upside effectively. That is why experts say balanced funds are a better choice for managing risk for most investors. Investors would be better off with a flexible allocation within a narrower band with a plain vanilla balanced fund

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Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds
Top 10 Tax Saver Mutual Funds to invest in India for 2016
Best 10 ELSS Mutual Funds in india for 2016

1. BNP Paribas Long Term Equity Fund
2. Axis Tax Saver Fund
3. Franklin India TaxShield
4. ICICI Prudential Long Term Equity Fund
5. IDFC Tax Advantage (ELSS) Fund
6. Birla Sun Life Tax Relief 96
7. DSP BlackRock Tax Saver Fund
8. Reliance Tax Saver (ELSS) Fund
9. Religare Tax Plan
10. Birla Sun Life Tax Plan

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SBI Blue Chip Fund

Posted: 02 Sep 2016 08:41 PM PDT

Large-caps lend safety to this fund while mid-caps spice up the returns

After a choppy start, the bellwether indices have surged since their February low. Some early signs of a pick-up in corporate earnings and expectations of an above-normal monsoon are positives that can drive market sentiment. But increasing commodity and food prices can play spoilsport in the coming months. The market has also entered into a fickle territory post-Brexit.

Hence, investors with a low to medium risk appetite can opt for large-cap funds that limit the downside risk.

SBI Blue Chip is one of the top-performing funds in the large-cap category. Over the last five years, the fund has delivered annual returns of 16 per cent, outperforming the benchmark — BSE 100 that returned 8 per cent. Over one- and three-year periods, the fund has outperformed the benchmark by 6-8 percentage points. Moreover, the fund has beaten its peers, such as Franklin India Bluechip, Birla Sun Life Top 100, DSPBR Top 100 and UTI Top 100 over the last one-, three- and five-year periods.

The fund's performance has also been consistent; delivering better returns over its benchmark, 87 per cent of the time on an annual rolling return basis over the last five years.

Portfolio and strategy

The fund's equity holdings have ranged between 82 and 97 per cent. It has shifted allocations towards debt and cash whenever markets turned volatile.

For instance, in October last year, when markets turned jittery, the fund trimmed its equity holdings to about 82 per cent. It has now increased it to 88 per cent. The fund invests mainly in large-cap companies and about 15 per cent in mid-caps that provide a kicker to returns. Last year, the fund outperformed the benchmark comfortably by advancing 8 per cent.

Banks, pharma and software are the top preferred sectors. Over the last one year, the fund exited media & entertainment, telecom and transport sectors. Healthcare services and power got berths in the portfolio instead. The fund has also increased allocations in cyclicals, such as cement, over the past six months. The fund is overweight on sectors such as healthcare, automobile, construction and chemicals compared with its benchmark.

But, it is underweight on financials, software, energy and FMCG sectors.

The fund has 50 stocks with low churning of portfolio. The exposure to individual stocks is restricted to below 3 per cent except in the case of its top five holdings. This mitigates risks. HDFC Bank, Infosys, Reliance Industries, Sun Pharmaceutical and Tata Motors are its top five holdings.

HDFC Bank and Infosys have fared well in the last one year. It added Mahindra & Mahindra last August.

Other stocks the fund added recently are Aurobindo Pharma, HCL Technologies, PI Industries and Eicher Motors; these are likely to yield returns in the long run.

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Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds