What is giving higher mutual fund returns? Find out here

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Mumbai | Published: July 8, 2016 6:08:39 AM

In the last one year, when equity markets have remained volatile, asset allocation funds as a category has delivered better returns compared to average large-cap, multi-cap and mid-cap funds

In the last one year, when equity markets have remained volatile, asset allocation funds as a category has delivered better returns compared to average large-cap, multi-cap and mid-cap funds. Asset allocation funds follow a formula-based process to determine the funds’ investments into equity and debt.

In the last one year, on an average, asset allocation funds have given returns of 6.52%, higher than average of large-cap funds and mid-cap funds which stood at -0.33% and 4.77% respectively. Officials in the mutual fund industry say that this category best suits the investors who are unsure of exact asset allocation of their portfolio.

Anil Ghelani, SVP, DSP BlackRock Investment Managers, said, “Even most of the bullish investors face the same dilemma as regular investors and that is to answer the question — when to make their entry into the equity markets? As a result, most investors keep waiting for the right time and tend to delay their decision making. Hence, we think asset allocation products are suitable for even the bullish investor, who is of the opinion that markets are set for a long-term bull run as the product takes emotions out of investing and aims to ensure that you enter equity markets at right valuations.”

DSP BlackRock Dynamic Asset Allocation Fund has given the returns of 7.81% in the last one year, while Birla Sun Life Dynamic Asset-allocation fund gave return of 10.12%. The investment strategy of DSP BlackRock Dynamic Asset Allocation Fund compares the equity market yield to the debt market yield, using both the long term interest rates (yield gap ratio) and the short term interest rates (modified yield gap ratio) to assess the relative valuation of equity and debt markets. If equity markets are cheaper in valuation than debt markets, then the Fund invests more in equity and conversely, if equity markets are relatively expensive than debt markets, then the Fund invests more in debt.

Asset-allocation formula changes from fund to fund, some are fund-of fund-of-funds, while some are actively-traded funds. For example, Franklin India Dynamic PE Ratio Fund of Funds an open-end fund of funds has an in-built buy-sell mechanism that is triggered by the PE levels of the NSE Nifty Index. The scheme will change its asset allocation based on the PE ratio band. At higher PE ratios, it will reduce allocation to equities in order to minimize downside risk. Similarly at lower PE ratios, it will increase allocation to equities to capitalize on their upside potential.

While SBI Dynamic Asset Allocation Fund uses a model-driven asset allocation process to dynamically allocate between equity, debt and cash based on market and economic conditions so as to provide investors with long term capital appreciation. However, markets participants say that, investors should have atleast three year of time horizon as asset-allocation funds are considered as non equity funds and are taxable if investors exits before three years.

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