Weekly Musings – NFO Pick (Parag Parikh Dynamic Asset Allocation Fund)

18 Feb 2024 , 06:38 PM

WHY DYNAMIC ASSET ALLOCATION FUND NOW?

The upcoming launch of dynamic asset allocation fund by Parag Parikh AMC raises an interesting question; why such a fund now? With stock markets at their life time highs, there is a case for investors to take exposure to debt too. One thing the markets have taught us is that predicting tops and bottoms in the market are impossible. The answer is asset allocation, that is not only strategic, but also dynamic. 

It is asset allocation that accounts for 65-70% of the swing in your portfolio returns. So, the first step is to get your asset allocation right. The Parag Parikh Dynamic Asset Allocation Fund NFO, not only offers this mix of equity, debt, and derivatives on a platter, but also offers the additional advantage of a dynamic approach. Here, the fund manager has the discretion to oscillate the portfolio between equity and debt, based on asset class view.

HOW THE FUND WILL INVEST AND WHY?

The Parag Parikh dynamic asset allocation fund will invest in a combination of equity and debt securities. In addition, it will also replicate some of the hedged positions with derivatives to ensure that the equity composition of the fund stays between 35% and 65%, the bare essential for the fund to be classified as a debt fund for tax purposes. The asset allocation is dynamic to keep the equity allocation in that range; either through direct equities or through hedged arbitrage positions. Fund managers will decide the allocation to debt and equity based on market conditions with a balance of returns and risk.

The fund is targeted at conservative investors who want to be in a debt fund but would not mind the added kicker of equity return accretion. In addition, the asset will be tweaked to make it fall under the definition of a debt fund (35% to 65% equity), so that post tax returns on the fund continue to be attractive. Technically, the exposure to equity and to debt can range between 0% and 100%. However, the fund will keep its equity and debt allocation in such a way that it continues to be classified as a debt fund for tax purposes for investors.

RATIONALE FOR EQUITY AND DEBT ALLOCATION

The rationale for equity and debt allocation must be understood at two levels. Firstly, there is a broad allocation between debt and equity. That will be done dynamically at the discretion of the fund manager based on a clear view on how asset classes will perform. The second critical question is how will the allocation within the debt and equity asset classes happen. Here are the pointers, and we start with debt, since it is structured as a debt fund.

• The security selection will be based on accrual and duration for creation of the debt portfolio. The main focus of the fund is to offer modest returns with minimal volatility. Hence the focus of the debt portion of the fund would be on safety and stability of returns. The investment basket would largely include AAA paper, high-quality PSU companies, as well as central and state government securities. The fund will also seek to capitalize on dynamically capture shifts in maturities based on maturity mispricing.

   

• What about the strategy for equity component allocation? Here again, the focus is on modest returns with minimal volatility. Hence, even the equity strategy will be conservative. It will focus on companies with strong cash flows and high dividend payout ratios. It will focus on stocks with a margin of safety; i.e., where the stock is trading at substantial discounts to the intrinsic value. While part of the equity portfolio will be opportunistic in nature, it will also use futures and options to hedge equity risk.

While the fund manager has leeway on asset allocation and on stock and bond selection, the broad theme will be stability of income with modest levels of risk.

WHO SHOULD AND WHO SHOULD NOT INVEST IN THIS FUND?

These are the two core aspects. The fund is not about returns or risk, but about suitability. It must fit into your medium term and long term financial plan. Let us first look at who should be considering investment in the Parag Parikh Dynamic Asset Allocation Fund.

1. This fund is ideal for investors who have a conservative approach and want the additional kicker of equity returns. The fund offers them a one-point window to allocation funds across equity, debt, and derivative products with controlled risk. Investors who are interested in debt for steady returns but have a problem with debt security selection should look at this fund seriously. For instance, individual investors may not have the ability to ride the yield curve, tweak quality or shift maturities. This fund can do all that on their behalf, while keeping its basic conservative colour.

    

2. While the dynamic asset allocation fund has managed selectively outperform in the long run, it is very dependent on fund manager strategy. Hence, it is meant for investors who can repose faith in the fund manager approach. Secondly, this fund is not for those who want high returns. In these type of fund, returns are lower since the risk is also comparatively lower. However, the mix of equity and debt can be very volatile in the short run, so investors must be prepared to deal with the volatility risk and fluctuations in the NAV in the short run. This fund is not meant for investors with the “get rich overnight” attitude or those who are looking for instant gratification.

The gist of the suitability story is that investors in  the dynamic asset allocation fund must take a long term view of 5-7 years at the bare minimum to realize full benefits.

PERFORMANCE OF DYNAMIC ASSET ALLOCATION FUNDS (BAF) IN INDIA

Here is a quick look at the best performing BAFs in India as of February 16, 2024. These are CAGR returns.

Scheme  Name	NAV  Direct	1-Year (%)  Returns	3 Year (%)  Returns	Returns (%) since Launch	AUM  (₹ Crore)
WhiteOak Balanced Advantage Fund	12.19	21.86		21.49	839.15
Franklin India Balanced Advantage Fund	12.86	25.97		19.00	1,652.53
Baroda BNP Balanced Advantage Fund	22.53	24.39	14.31	16.68	3,736.88
HDFC Balanced Advantage Fund	485.07	39.85	23.95	16.44	79,188.41
Mirae Asset Balanced Advantage Fund	12.58	22.52		16.29	1,507.90
Mahindra Manulife BAF	13.65	31.94		15.70	700.80
Tata Balanced Advantage Fund	20.12	22.20	13.73	14.83	8,583.38
SBI Balanced Advantage Fund	13.86	25.61		14.18	28,049.58
Shriram Balanced Advantage Fund	18.24	26.76	12.77	13.88	45.20
ICICI Prudential BAF	70.06	20.19	13.02	13.33	55,020.69
Edelweiss Balanced Advantage Fund	50.56	24.44	13.37	13.27	10,656.31
Invesco India Balanced Advantage Fund	54.65	24.89	13.07	13.15	703.29
NJ Balanced Advantage Fund	13.22	31.15		12.90	3,996.68
Nippon India Balanced Advantage Fund	170.58	22.40	13.48	12.60	7,625.23
Aditya Birla Sun Life BAF	100.54	20.15	12.16	12.35	7,053.08
HSBC Balanced Advantage Fund	43.53	22.38	11.18	12.21	1,403.05
Kotak Balanced Advantage Fund	18.85	17.75	11.60	12.11	15,761.64
PGIM India Balanced Advantage Fund	14.06	16.87	11.26	11.89	1,192.65
Union Balanced Advantage Fund	19.31	19.49	10.27	11.32	1,639.22
Axis Balanced Advantage Fund	19.47	24.89	12.10	10.71	2,028.04
Sundaram Balanced Advantage Fund	35.80	20.33	12.43	10.64	1,526.92
Motilal Oswal Balance Advantage Fund	20.99	29.04	10.65	10.55	1,236.76
DSP Dynamic Asset Allocation Fund	26.47	18.26	9.28	10.19	3,162.53
LIC MF Balanced Advantage Fund	12.40	15.19		9.96	909.82
Bandhan Balanced Advantage Fund	23.96	17.96	10.24	9.78	2,244.54
Bank of India Balanced Advantage Fund	24.74	24.55	14.70	9.55	118.33
ITI Balanced Advantage Fund	14.40	26.24	14.13	9.23	333.48
UTI Unit Linked Insurance Plan Fund	38.76	12.56	7.72	9.05	5,298.83

Data Source: AMFI India

To get a picture of how these dynamic asset allocation funds (Balanced Advantage Funds) have performed, we have considered 1-year returns, 3 year returns and returns since launch. For all these, only the direct plans have been considered since they would give a better picture of what the fund has generated without letting the total expense ratio (TER) distort the picture of returns. There are 25 dynamic asset allocation funds (BAFs) in India managing a total corpus of nearly ₹2,40,000 Crore. Out of these 25 funds, just 5 funds; HDFC BAF, ICICI Prudential BAF, SBI BAF, Kotak BAF and Edelweiss BAF manage about 79% of the total AUM of dynamic asset allocation funds. Here are the highlights of the performance of BAFs across various time frames.

• On a 1-year returns basis, the dynamic asset allocation funds (BAF) universe in India has generated maximum returns of 39.85% and minimum returns of 12.56%, showing vast variation due to the dynamic nature of these funds. The average returns over a 1 year period are 23.1%, but 1 year may actually be a very short time frame.

   

• On a 3-year returns basis, the dynamic asset allocation funds (BAF) universe in India has generated maximum returns of 23.95% and minimum returns of 7.72%, again showing vast variation due to the dynamic nature of these funds. The average returns over a 3-year period were 12.56%, but it is surprising that variations are so high in 3 years also.

   

• If you look at BAFs since inception, they have generated maximum returns of 16.44% and minimum returns of 9.05%, which shows that the dynamic nature of the fund is resulting in vast variations. The average return since inception is 12.24%.

One quick takeaway is that, due to vast variations, it is the fund selection that would be very critical in the case of dynamic asset allocation funds.

GLANCE AT THE PARAG PARIKH DYNAMIC ASSET ALLOCATION FUND NFO

Here are some details of the Parag Parikh Dynamic Asset Allocation Fund NFO you must know to decide on investing in the fund.

1. The NFO of Parag Parikh Dynamic Asset Allocation Fund opens for subscription on February 20, 2024 and will close on February 22, 2024. The allotment date will be February 27, 2024 and the fund house will offer purchase and redemption at NAV linked prices from February 28, 2024 (the reopening date).

    

2. The Parag Parikh Dynamic Asset Allocation Fund NFO offers an opportunity to investors to participate in a diversified portfolio of equity and debt, offering capital appreciation and income generation. Fund manager has full discretion in allocation

    

3. Entry loads do not exist in India. Exit loads will not be applicable up to 10% of the units invested. However, any sale or switch-out beyond 10% of holdings will be subject to 1% exit load, if sold before 1 year of the allotment. However, it is suggested to stay invested for at least 5-7 years to get full benefits of the BAF.

    

4. In the NFO, investors can put in applications for a minimum of ₹5,000 and in multiple of ₹1 thereafter. Additional purchases on an ongoing basis will also be in multiples of ₹500. The TER will be (0.60% + GST) for Regular Plans and (0.30% + GST) for Direct Plans.

    

5. The fund offers Regular and Direct plans for the investors. In addition, investors can either choose the Growth option or the IDCW (income distribution cum capital withdrawal) option. Dividend plans offer payout and reinvestment options.

    

6. The Parag Parikh Dynamic Asset Allocation Fund will be benchmarked to the CRISIL Moderate 50+50 Moderate Index. Such comparisons would typically add value over a longer time frame of 5 years or more only. It is classified as a Moderate Risk fund.

    

7. The fund managers for the Parag Parikh Dynamic Asset Allocation Fund will be the same as for other schemes, being a relatively small AUM fund house. The core fund team includes the CIO, Research Head and the Equity and Debt fund managers.

    

8. The Parag Parikh Dynamic Asset Allocation Fund will maintain equity allocation between 35% and 65%, so it will be treated as a debt fund for taxation purposes and taxed accordingly. STCG (upto 3 years) will be taxed at incremental tax rates while LTCG (beyond 3 years) will be taxed at 20% with indexation benefits.

The Parag Parikh Dynamic Asset Allocation Fund NFO is an opportunity for investors to combine capital appreciation and income generation in a single package along with fund manager discretion on allocation between debt and equity.