Weekly Musings – NFO Pick (SAMCO Dynamic Asset Allocation Fund)

20 Nov 2023 , 09:20 AM

HYBRID PUSH – WHY DYNAMIC ASSET ALLOCATION FUND?

SAMCO is one of the recent AMC entrants in India and its latest NFO offering is the SAMCO Dynamic Asset Allocation Fund. These funds are also popularly known as Balanced Advantage Funds or BAFs and are quite popular in India with AUM among the highest in hybrid categories. Like any hybrid fund, the dynamic asset allocation fund will invest in a mxi of equity and debt. However, where it differs is in the manner of allocation. Normally, Aggressive Hybrids or Conservative Hybrids or Balanced Hybrids typically mix equity and debt in a set proportion. Deviations from this mix are normally quite few. However, in the dynamic asset allocation, the equity allocation can range from 0% to 100% while the allocation to debt can also range from 0% to 100%. This may be an extremely example, but the moral of the story is that these funds tend to give total discretion in asset allocation to the fund managers, although the allocation in most cases is based on a quantitative model.

WHAT EXACTLY DO DYNAMIC ASSET ALLOCATION FUNDS DO?

A dynamic asset allocation fund brings two key characteristics to the table. Firstly, it eliminates the need to time the market. That is because, the dynamic asset allocation fund model is structured in such a way that it automatically toggles between equity and debt based on some set parameters. Secondly, these dynamic asset allocation funds are better suited to create and preserve wealth in the long run. Remember, in the long run, nearly 80% of your wealth is created by the right asset allocation. That is where these dynamic asset allocation funds score. Let us now turn to the pros and cons of such dynamic asset allocation funds in India.

• To begin with, the fund offers diversification across asset classes. It is not just diversified within equities, but also across debt. It is like a triple advantage. You get equity, you get debt and you also get dynamic allocation under one single roof. 

   

• Thes dynamic asset allocation funds are also extremely good at riding the trend or momentum which is current. For example, if the valuations of equity are compelling, then the fund can shift substantially to equity. The reverse holds true of the equities are overpriced or if rates are likely to go down sharply. In that case, a shift to debt would help the overall portfolio returns.

   

• The dynamic allocation approach obviates the need to time the market. Buy low and sell high is easier said than done. On the other hand, these dynamic funds use a more process based approach and are hence more scientific in their approach to asset allocation. It becomes an auto timer of the market, without trying to be too intrusive.

   

• While most of the dynamic asset allocation funds can go from 0% to 100% in equity and debt, they normally trend to hold the allocation to equities at above 65%, through a mix of equity and derivatives. In fact, they replicate debt by creating arbitrage position in equity. This gives them the added advantage of lower taxation.

Are there any risks to a dynamic asset allocation approach. Some of these risks follow logically. For instance, the taxation may be like a debt fund if the fund manager allows the debt to predominate the portfolio at above 35%. These funds can only give a clear picture of their performance and efficacy if held for a period of at least 8-10 years. That is a real long term holding required.

WHO SHOULD OPT FOR DYNAMIC ASSET ALLOCATION FUNDS

While dynamic asset allocation is a long term bet, here are some test cases wherein the dynamic asset allocation model can work really well.

• The dynamic asset allocation fund would work very well in case you are looking at a more rule-based allocation across equity and debt. Investors must believe in the power of asset allocation in determining long term returns.

   

• The investment must be down in funds where the investors have faith and comfort level with the fund managers. The dynamic asset allocation funds are largely about fund manager discretion in investment and hence your trust and confidence in the fund manager is crucial. Only opt for the fund if you have that confidence.

   

• Invest in dynamic asset allocation if you are comfortable with model based tweaks to the allocation to equity and debt. This process involves higher cost, but it can manage allocation more efficiently than you doing it yourself, considering the taxation costs. That should be a key reason or preferring this dynamic asset allocation fund route.

   

• The dynamic asset allocation fund is a good alternative to timing the market in a more organized and systematic manner. Also, the fund manager can replicate debt exposure by taking quasi equity exposure via arbitrage positions across equity and futures. 

   

• The dynamic asset allocation approach is open to the slightly more sophisticated investors who are willing to and capable of bearing the risk of dynamic asset allocation and asset class churn.

   

• Last, but not the least, this approach best suits investors who are willing to stay invested in this model for the long haul. You can actually see the benefits of dynamic asset allocation only if you stay invested for a period of 8-10 years. That will also encompass multiple economic cycles and yield the most effective results.

   

5 KEY HIGHLIGHTS OF THE SAMCO DYNAMIC ASSET ALLOCATION FUND NFO

What can make the SAMCO Dynamic Asset Allocation fund stand out. Here are some unique characteristics that keep the fund strategy apart.

1. The fund follows a Momentum Trend Following System. This system dictates that the focus of the portfolio would be weighted in favour of equities as long as the trend is upwards, not otherwise. 

    

2. The second big rule of the Samco Dynamic Asset Allocation Fund will be Drawdown Protection. In a falling market, the whole idea would be to strategically and methodically shift to debt to cut the losses in a falling market. Here the focus would be to preserve capital and not on enhancing returns. 

    

3. Needless to say, the allocation logic will be Dynamic In Nature. Technically, the fund will transform from 100% Net Equity & 0% Debt or 100% Debt & 0% Net Equity. These would be the extreme cases.

    

4. The dynamic asset allocation in the fund will be based on a Real Time Allocation Model. The model is designed in such a way that it allows quick re-allocation to Debt from Equity Model and vice versa. The rigidity of time bound rebalancing cycles becomes tough to implement and that is something the fund will stay away from.

    

5. Finally, the fund will studiously follow a Stop Loss Model. In other words, it will very quickly cut equity exposure, risks and protects downside in tough times. This will specifically apply where net equity exposure (net of derivatives) is a naked position.

HIGHLIGHTS OF THE SAMCO DYNAMIC ASSET ALLOCATION FUND NFO

Here are some key takeaways that investors should know about the NFO.

• The SAMCO Dynamic Asset Allocation Fund NFO opens for subscription on December 07, 2023 and closes on December 21, 2023. Umesh Kumar Mehta, Paras Matalia and Abhiroop Mukherjee will be the fund managers. 

   

• It is an open ended mutual fund scheme which is classified as a hybrid mutual fund scheme under SEBI classification norms. Any hybrid allocation fund runs the risks of equity as an asset class, debt as an asset class and the risk of dynamic asset allocation and fund manager discretion.

   

• The performance of SAMCO Dynamic Asset Allocation Fund will be benchmarked to the Nifty 50 Hybrid Composite Debt 50:50 index. The TRI index is the total returns index, which not only factors the capital gains but also the dividends received by the components of the index.

   

• The objective of SAMCO Dynamic Asset Allocation Fund is to generate capital appreciation and income generation in the medium to long term. The portfolio will be dynamically managed in terms of its asset allocation. 

   

• Lumpsum purchases in the NFO entail a minimum investment of Rs5,000 per application and in multiples of Rs1 thereafter. However, once the fund opens for continuous purchase and redemption post the closure of the fund, the minimum application will be Rs500 per application. The SIP investment will also have a minimum base of Rs500.

   

• There will be no entry load on the fund. However, being a high-risk and long term sectoral / thematic fund, the SAMCO Dynamic Asset Allocation Fund will impose an exit load in a layered manner. 25% of the units allocated can be redeemed at any point of time without any exit load. Any redemption above 25% of the holdings will be subjected to exit load if redeemed within 12 months of the allocation of such units. There will be no exit load after that. 

   

• The SAMCO Dynamic Asset Allocation Fund offers Regular Plans and Direct Plans to investors with the TER adjusted accordingly. In addition, the fund also offers investors the growth option, the IDCW payout option and the IDCW reinvestment option.

   

• The fund should be held for a minimum period of 5 years, ideally, or more to derive the full benefits of dynamic asset allocation.

It must be noted that in the equity funds, the dividends are taxable at the marginal rate of tax while capital gains are taxed at concessional rates of 15% for short term capital gains and 10% for long term capital gains.

UNDERSTANDING THE DYNAMIC ASSET ALLOCAITON FUND UNIVERSE IN INDIA

Here is a quick look at the other existing dynamic asset allocation funds available in India at the current juncture. 

Scheme Name	NAV  Direct	1-Year Returns (%)	CAGR since Launch (%)	Benchmark Returns (%)	Daily AUM
HDFC Balanced Advantage Fund	421.85	22.86	15.36	11.72	66,996.16
Baroda BNP Paribas BAF	20.47	13.92	15.36	11.72	3,404.93
Franklin India BAF	11.75	14.50	14.42	8.75	1,427.74
Tata Balanced Advantage Fund	18.38	12.12	13.50	12.26	7,718.22
ICICI Prudential BAF	64.90	12.24	12.86	10.24	51,029.37
Mirae Asset BAF	11.64	13.52	12.71	8.68	1,329.85
Invesco India BAF	49.83	13.35	12.51	9.54	647.06
Edelweiss Balanced Advantage Fund	45.44	11.84	12.48	10.38	9,612.95
Nippon India BAF	155.80	11.11	11.97	11.60	7,095.76
Aditya Birla Sun Life BAF	93.18	11.43	11.87	11.60	6,741.99
HSBC Balanced Advantage Fund	40.08	13.88	11.65	10.38	1,348.96
Kotak Balanced Advantage Fund	17.65	12.38	11.33	10.54	15,052.53
Shriram Balanced Advantage Fund	15.97	11.09	11.30	10.87	41.82
SBI Balanced Advantage Fund	12.54	15.31	10.75	6.43	25,014.35
PGIM India Balanced Advantage Fund	13.23	9.61	10.58	9.47	1,288.66
Motilal Oswal BAF	20.49	25.39	10.57	10.78	812.46
Union Balanced Advantage Fund	17.70	10.21	10.18	10.39	1,593.35
Sundaram Balanced Advantage Fund	32.92	9.67	10.05	9.85	1,529.42
Mahindra Manulife BAF	11.94	13.39	9.86	7.04	577.90
DSP Dynamic Asset Allocation Fund	24.78	11.78	9.72	12.25	3,198.35
Bandhan Balanced Advantage Fund	22.55	11.41	9.34	10.31	2,323.61
Axis Balanced Advantage Fund	17.53	11.94	9.32	10.08	1,915.16
UTI Unit Linked Insurance Plan Fund	37.47	7.93	8.92	10.08	5,260.11
Bank of India BAF	21.87	8.91	8.41	11.21	105.32
NJ Balanced Advantage Fund	11.76	17.01	8.22	5.97	3,668.98
LIC MF Balanced Advantage Fund	11.66	9.07	7.91	5.35	977.03
ITI Balanced Advantage Fund	12.73	12.02	6.41	11.21	320.72

Data Source: AMFI

As can be seen above, there are 27 dedicated dynamic asset allocation funds available in India. The enthusiasm has not been too great in recent months, but there were the preferred funds in 2021 and 2022 among the HNI investors. If you look at fund performance since inception, the returns range from 6.4% to 15.3%. Being a dynamic allocation fund, a lot depends on the quality of the allocation model and how it is implemented by the fund manager. This can be an important value addition to the portfolio, at a time when markets are already volatile and asset allocation is likely holding the key to the future of fund performance. Dynamic allocation is not just about enhancing returns, but more about managing risk.