dynamic asset allocationBNP Paribas Asset Management India, which has over Rs 6500 crore in domestic funds across asset classes from over 700,000 client folios, has launched the new fund offer of BNP Paribas Dynamic Equity Fund. This is an open-ended dynamic asset allocation fund. The NFO period of the product ends on Thursday, February 28, 2019.

Such scheme dynamically allocates money between equities, debt, and arbitrage by following a valuation model. Market volatility is inevitable. Reducing volatility in such market scenarios may be achieved through an asset allocation strategy – this is the basic attraction of dynamic asset allocation funds. So, what is special about the 22nd dynamic asset allocation fund in the industry? RupeeIQ decodes the product and helps you take an informed decision.

Need for asset allocation based strategy

While wealth creation may occur over the long term through investments in equity as an asset class, volatility is one thing which cannot be avoided. According to BNP Paribas, one of the ways which can help reduce volatility is through a dynamic asset allocation strategy. This has to be done through a model-based approach (e.g. reducing equity exposure at higher market valuations) while managing the risk profile of the overall portfolio. Also, one has to take opportune bites into the equity market in times of volatility with possible reasonable upside participation.

The valuation model is handy because it makes the entire process scientific. Otherwise, the process of taking asset allocation calls (e.g. buy stocks, sell debt etc.) becomes subjective and susceptible to human errors.

Price to Earnings (PE) model for equity allocation

Various factors were considered for the asset allocation model. However, BNP Paribas Dynamic Equity Fund will use Price to Earnings (PE) as metric. Unlike some other funds, this scheme is clear that a mix of different factors (like dividend yield, price to book etc.) may offer conflicting investment decisions.

Trailing PE ratio is representative of the market trends and hence considered as the indicator for determining equity allocation. Trailing PE is about historical earnings (usually preceding 12 months). Forward-looking PE may be exciting, but which forward estimates to take is a big problem.

Equity asset allocation model based on trailing PE of the Nifty 50 index. The endeavour is to increase exposure to equities when the market appears cheaper (lower PE). Conversely when the market becomes expensive (higher PE) scheme to reduce its equity exposure and allocate it to equity arbitrage and fixed income instruments. The portfolio may be rebalanced monthly depending upon the trailing PE levels of Nifty Index.

As per BNP Paribas Mutual Fund, arbitrage allocation will be used to maintain net asset exposure towards equity related instruments to take advantage of the pricing differential or arbitrage between stocks traded in the cash and derivatives segments to generate returns.

Take a look below for the indicative guidelines for asset allocation changes.

BNP Dynamic Bond Fund

Having a good model is great. Having conviction is even better. But that being said, we are not great fans of back-testing of data that fund houses often show to investors.

Back-testing is like using a program to show how Virat Kohli would have played against Alan Donald or Wasim Akram. We look forward to real performance.

Portfolio orientation

As per the fund-house, BNP Paribas Dynamic Equity Fund’s portfolio would maintain at least 65% of net asset exposure to equity and equity related instruments at all points in time thus offering equity taxation. So, you will get equity fund taxation.

The fund will aim for a diversified portfolio investing across sectors and market capitalisation.

Along with direct equity, the fund will allocate the remainder portion to arbitrage opportunities generated from pricing differential between stocks traded in the cash and derivatives segments.

The rest allocation to money market and other fixed income securities will be decided after considering the economic environment, sector performance, general liquidity, etc. in the economy and markets.

Fund details

Asset Allocation: Equity & equity related instruments including derivatives: 65-100%; Debt instruments & Money Market Instruments (including cash and money at call): 0-35%; Units issued by REITs & InvITs: 0-10%

Benchmark: CRISIL Hybrid 35+65 – Aggressive Index

NFO Closes: Thursday, February 28, 2019

Re-Opens: Within 5 business days from the date of allotment.

Fund Manager: Karthikraj Lakshmanan (Equity) & Mayank Prakash (Debt). Both have 13 years of experience each.

Entry Load: Nil

Exit Load:
• If units redeemed or switched out up to 10% of the units (the limit) within 12 months – Nil
• If units redeemed or switched out in excess of the limit within 12 months – 1%
• If units redeemed or switched out after 12 months – Nil

Plans and Options: The Scheme offers the following two plans: BNP Paribas Dynamic Equity Fund-Regular Plan and BNP Paribas Dynamic Equity Fund-Direct Plan. Each Plan has the following options: Growth Option, Monthly Dividend Option, Quarterly Dividend Option, Annual Dividend Option. The above dividend option shall have dividend payout and dividend reinvestment facilities.

RupeeIQ take – Investors should remember, an asset allocation model unless used smartly will not always meet its objectives. The wide range of returns of the existing dynamic asset allocation funds is proof of the same. There are funds that have failed to give 8% CAGR in three years, while the best funds have delivered 16% CAGR in the same time period. Basically, it all depends on the strict process-driven investment approach and whether the fund manager heeds to the actions suggested by the model e.g. decide when to increase/reduce investment in equity or debt. Then, there is the job of the selection of stocks and debt securities. The market may indicate ‘buy stocks’, but unless the fund manager buys the right ones, there is no point. So, long exposure is required to judge the true mettle of the model and the fund.

Disclaimer – Please note that investors are requested to consult their financial, tax and other advisors before taking any investment decision.

Author
Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on kumarsroy@rupeeiq.com