This is another post from the Suggest a Topic page, and this time we’re going to take a look at what a Dynamic PE ratio fund is, and look at one such fund – the FT India Dynamic PE Ratio Fund in detail.
As the name suggests – a dynamic PE fund allocates its money between debt and equity based on the P/E levels of an underlying index.
The idea is that you use the P/E level of the market to indicate if the market is over – priced or not, and then adjust your investment accordingly. I have written about this topic in an earlier post about P/E levels and market indicators, so you can read that if you’re interested in seeing some numbers and charts explaining the idea more.
At a high P/E level you buy more debt and less equity, and at a low P/E level you buy more equity and less debt.
In the case of FT India Dynamic – the underlying index is the NSE Nifty, and the investment allocation will be according to the following rule:
| NSE Nifty P/E Band | Equity | Debt |
| Upto 12 | 90 – 100 | 0 – 10 |
| 12 – 16 | 70 – 90 | 10 – 30 |
| 16 – 20 | 50 – 70 | 30 – 50 |
| 20 – 24 | 30 – 50 | 50 – 70 |
| 24 – 28 | 10 -30 | 70 – 90 |
| Above 28 | 0 – 10 | 90 – 100 |
The fund will move your investment from equity to debt based on where the P/E ratio is at that time.
To get equity exposure it will invest in the Franklin India Bluechip Fund, and to get debt exposure it will invest in the Templeton India Income Fund.
So, it is a fund of fund that invests in underlying funds from its own family based on where the P/E stands at that point in time. The expense ratio of this fund is 0.75%, so that’s money you pay in addition to the expenses of the underlying fund.
Let’s look at performance now.
| Time Frame | FT Dynamic P/E Fund | BSE Sensex |
| Since Inception | 20.80% | 20.39% |
| Last 5 years | 13.75% | 11.50% |
| Last 3 years | 12.01% | 7.52% |
| Last 1 year | 8.74% | 10.94% |
So, you can see that the fund has done fairly, and beaten the index when looked at a longer perspective.
Due to the portion of debt in the fund: while it protects you from downswings – it also limits your gains when the markets do very well.
From the prospectus I see that fund fund rose ~ 53% in 2006 when the Sensex rose ~74%, and it rose ~56% in 2010 when the Sensex rose by ~ 80%.
The fund still beat its benchmark but if you look at my best balanced funds post you will notice that there are quite a few funds that have bettered this performance over the 3 year and 5 year range.
So, when thinking about investing in a PE fund – whether this or another – just take a look at how other balanced funds are performing as well because they are similar in structure.
One last point about the tax structure is that the Dynamic PE fund is not treated as an equity fund (which has tax advantages over other funds), because it can have a lot of debt in its structure as well.
As always, whether to invest or not is a decision that you have to take, and I hope this information can give you some input on that decision.
Manshu,
Interesting article, i checked out the fund, some surprising results.. compare the absolute returns versus the SIP return, the fund started in November of 2003, if i had put 180,000 as a lump sum at the begining of the fund.
My returns are great in these last 8 years
Absolute Returns: 306.8%*
NAV as on November 10, 2003: Rs 10.050 | NAV as on April 27, 2011: Rs 33.859
My fund value would have been Rs 7,32,240
where if i had used the SIP ..
SIP – Return – Only 13.08% after religiously investing Rs 2000 over 8 years…
FT India Dynamic PE Ratio Fund of Funds (D)
Investment Period Nov 10, 2003 to Apr 10, 2011
No of Investments 90
Total Amount Invested (Rs)
180,000.00
Total Units Purchased 8,603.05
Investment Value as on Apr 10, 2011 294,112.33
Latest NAV 33.859 (as on Apr 27, 2011)
why such discrepancy especially for a fund whose USP is to switch from equity to debt and back to equity….
i must be doing something wrong here… as i have all my MF investments in SIPs
Regards
Sorabh
Sorabh – those two are not strictly comparable because in one case you’re starting out with 180K and allowing it 8 years to compound whereas in the other you’re giving only 2K the chance to compound over 8 years, and the corpus even after 4 years is just 96K (about half of your comparison fund at the beginning and half the time period has already gone).
So, that’s not a valid comparison in my opinion.
Please let me know what you think.
Manshu – Thanks for your comments..
i am trying to make a case for SIP, coz thats what i hear people and consultants say, that dont invest in lump sum, invest in SIP, may be i am digressing from the PE fund topic, but of all the funds, it should be the PE fund which should have protected the investment from the vagries of the stock market….
that said, do you think investing in lump sum in a MF is better than a SIP, say ones time horizon is long term, like 30 yrs… targetting retirement, in that case instead of SIPPING every month some 15K spread accross 3 or 4 funds, wouldnt one be better off investing 40 K , 40K, 50K, 50K in lumpsum at some point of the year and then done with…. the discipline which one talks about SIP can be inculcated in lumpsum also if one is really concerned about ones sunset years… like i am 🙂 .
( Let me know if you want this to be posted in sip vs lumpsum somewhere in your blog )
As always…. great work….
regards
Sorabh
Thanks Sorabh – So, the question I’d ask you is what your thoughts were during the crash of 2008? Were you buying heavily at that time of panic? If that was the case then yes you are definitely good to invest lump sum and are well versed with the psychology of the market. The answer to that question is very important in my opinion.
The point of SIP is that it helps you overcome volatility and ignore market mania around you. Now, I will say that for most people this is a good thing, but at the same time the mania does create opportunities that can be used by others (at least in theory). If you were buying after the 2008 crash then that’s a sign that you’re well versed with the market and are able to ignore the craziness. If not, then I’d like you to be cautious till you experience at least one major crash and live through it without losing a lot of money or sleep.
What do you think? Does this make sense?
Manshu
when the 2008 happened, i was still heavily invested in equities directly, i didnt leave my positions, but over the next two years i kept adding the stocks at lower levels to average out my positions ( i could do that as i didnt need the money ) but yes i didnt make any fresh investments or took new positions, in early 2010 i moved out of those equities. There after i have started few SIPs and hence the thought that say 10 years down the line and with all this discipline would i be short changed for the hard earned money ?
will be looking at statements of 12% return on these MFs, i will not be happy to note that kind of returns… so the point is just like in case of stocks, even for MFs if you are not able to add considerably to your existing SIPs when the markets tanks, you will not be able to build a healthy corpus or retirement nest .
Also Manshu – do you have any example of any MF in which the SIP has out performed the lumpsum for over 10 year period ? because if you dont then we cannot say that “SIP helps you overcome volatility”
Thanks for your time…. as always…
Regards
Sorabh
Thanks for your reply Sorabh – if you’re able to deal with crashes without getting into panic selling, and have even added to your positions during times of stress that’s a good sign. But still it’s not for me to say that you should time the market, since that doesn’t work for most people, so I’ll just advise you caution if you will – ultimately its your decision.
As for example you will find a lot of those on the web where people have shown that you can accumulate more units through SIP than otherwise but I don’t agree with their methodology because hindsight is always 20 – 20 and its easy to look back at a time period and say if you had done so and so you would have accumulated more units. In fact I wrote about this over a year ago in this article.
http://www.onemint.com/2010/03/24/systematic-investment-plan/
To me, the ultimate benefit is that you’re not swayed by market movements and invest regularly, and build a corpus for long term without trying to time the market. SIP is no magic bullet like much else in investing 🙂