With rising competition, mutual funds have to consistently come up with new ideas to bolster their assets under management (AUM). In order to achieve that, funds use the old tactic of aggressively touting their good performing funds.
Also, to maintain the flavour of the season, funds introduce new kinds of products, every now and then. However, often it is seen that such new products offer little, in terms of strategy or choice of stocks.
Recently, one such category in news is dynamic funds. The investment objective of these schemes is to provide long-term capital appreciation by allocating funds in equities. These funds also propose to allow the flexibility of moving entirely, if required, to debt instruments when the market is coming off its highs or the sentiment is negative.
There are various reasons why such funds can be criticised. The main reason is such funds are trying to achieve what goes against the basic principle of stock market investing. That is, trying to time the market.
Also, since a lot of portfolio churning is required to keep up with the existing market conditions, there will be additional costs, thereby reducing overall returns for the investor. At present, there are three funds trying to achieve this objective.
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A look at the table (Comparative performance) and it isquite clear that the performance of the funds have not been up to the mark. For instance, ING Dynamic Fund has done quite badly over a one-year period. And this happened, despite the fund's small corpus of Rs 58 crore.
The portfolio as on April 30, 2008 had around 33 stocks, but the overall exposure to equities was only 16.86 per cent. The debt component was quite high at around 51.54 per cent and cash component was at 31 per cent.
ICICI Dynamic, which has been a stellar performer, (not due to a perfect timing strategy, but more so because of being invested in a bullish market) has lagged in the last several quarters.
In fact, its performance in the last one year has gone downhill, despite having between 87- 91 per cent of its corpus in equities.
The fund manager's overall stock and sector selection has not been very inspiring, especially in the last one year. And we are yet to see when the scheme has actually exercised the proposed dynamic strategy of moving between equity and debt.
HSBC Dynamic Fund has been in existence for a relatively short period of time. But going by the performance of peers, it's more likely that it will go the same way, if it tries to aggressively time the market.
During the launch of HSBC Dynamic Fund in August 2007, the note read something like this, "At such levels, HSBC Dynamic Fund may be a good option for investors. HDF has the flexibility to actively switch asset allocation between equity and debt/money market instruments, up to 100 per cent in each. This feature makes the product less volatile, in terms of absolute returns and a good option in the kind of markets that we have seen in the past few weeks."
Further, the note went on the explain how the fund manager would have an un-invested corpus after the new fund offering that would be invested in highly liquid money market instruments, which could be deployed at the right market opportunities.
Also, investors would get the advantage of "bottom fishing" (picking viable stocks that are temporarily undervalued) by the fund manager.
Fast forward to May 2008 and the fund has not even beaten its own flagship HSBC Equity Fund. Between September 28, 2007 and May 8, 2008, HDF has returned 0.0355 per cent vis a vis HSBC Growth's 7.09 per cent. Even a balanced scheme like DSP Merrill Lynch Balance Fund has given returns of 3.8 per cent in the same time period.
As it is evident, the concept of dynamic funds may sound very good to the lay investor. Especially, when they see that the markets are volatile, the general belief is that there will be aggressive churning (which, only will increase costs) to make sure that they are always at the right place and at the right time.
But, more often than not, it is absolutely impossible to achieve such goals. More importantly, timing the markets consistently and successfully is wishful thinking, both for the investor and fund manager.
The writer is director, My Financial Advisor