An interesting Mutual Fund – Part 2

After going through the first of this series An interesting Mutual Fund – Part 1, one would agree that that the amount of debt and equity that one should have in their portfolio should be based on the valuations prevailing at a certain point of time and not on a pre-determined ratio.

The FT India Dynamic PE Ratio Fund of Funds (FTDPEF) from Templeton India is one such fund that invests in debt and equity based on the current valuation of equity. This is a Fund of Funds (i.e. Mutual Fund that invests in other mutual funds) that is open ended (one can buy and redeem at any point of time thus providing the highest level of liquidity). This scheme invests in Franklin India Bluechip Fund (FIBCF), an open end diversified equity scheme and Templeton India Income Fund (TIIF), an open end income fund that invests in debt instruments. The fund manager has been given the mandate to allocate to FIBCF determined based on the month-end weighted average PE ratio of the NSE Nifty Index, as shown below; and the balance is invested in TIIF. Please note that the PE ratio is the period/year completed and not on a forward basis (which will lead to confusions on what is the future valuation etc) which would have been more appropriate but obviously there is no uniform basis on which the ratio can be determined and agreed by one and all.

Weighted average PE     Equity Component (%)   Debt Component (%)
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 PE ratio of the index is the weighted average PE ratio of the constituent stocks of the index, which in the case of FTDPEF is the NSE Nifty Index.

Thus, by following the dynamic asset allocation strategy, FTDPEF increases the allocation to FIBCF when markets are down, i.e when PE ratio falls to help one capitalize on the upside potential, and reduces the allocation to FIBCF when markets are high, i.e when PE ratio is high to limit the downside risk.

I personally think that this is a good scheme to invest in equity and debt markets if one agrees on the portfolio structure based on valuations and not on a pre-determined ratio between equity and debt irrespective of valuations.