If you are conscious of equity index levels and valuations and therefore, like to employ a quantitative approach to investing in equities, IDFC Dynamic Equity Fund could be an option worth exploring.
This new fund offer from IDFC Mutual is an open-ended equity fund that will invest in equity, derivatives and debt, taking into account two key factors – the Nifty’s price earnings valuation and the 200-day daily moving average of the Nifty. The NFO will close on October 1. It will re-open for ongoing subscription from October 13.
About the fund
IDFC Dynamic Fund can be viewed as being similar to an actively managed index fund. The fund will track the Nifty and CNX Nifty and try to build equity positions that will be, as far as possible, similar to weights in the index. However, its equity exposure itself will be determined by a quantitative model that will take in to account long-term fundamentals through price earnings valuations, as well as short-to-medium term market movements by tracking the Nifty’s 200-day moving average levels.
Take a look at the graphic below. The fund will first look at the month-end weighted average price earnings valuation of the index (could be Nifty or Junior Nifty) to provide the longer term trend based on fundamentals. This will of course set the trend. However, there could still be short to medium term opportunities based on the index’ daily moving averages.
Historically, daily moving averages have helped provide a trend on whether the equity market is turning bullish or bearish. To not miss out on such opportunities, the fund will choose to increase or decrease allocation to equities, based on this trend. To give an example, when the Nifty is at say 18 times historical P/E, it could mean that valuations are not cheap.
However, when the Nifty is greater than its 200-day moving average, it could suggest a positive upward trend. Hence, the fund may still hold anywhere between 65-83% in equities. However, in the same P/E band, if the Nifty index value is lower than its 200-day moving average, it could well suggest a downward movement of the index. In this scenario, the fund will reduce its equity exposure to the 30-48% range.
Derivative exposure: What happens in the above scenario when equity exposure goes below 65% (which is the average holding required in equities to be classified as an equity fund for tax purposes)?
In such a scenario, the fund is allowed to take up to 35% exposure to derivatives. That means its net exposure to equities can be just 30%. A maximum of 35% can be allocated to debt.
IDFC Dynamic Equity is not comparable to most other valuation-based funds for the following reasons: one, it will use the key indices as its benchmark and seek to have weights similar to such indices. However, it is not an index fund as it will be actively managed. Funds from the Franklin or DSP BR stable that offer dynamic exposure are fund of funds.
Two, this fund seeks to use both long-term and short-term indictors (P/E valuation and daily moving average) – which are fundamental, as well as trading indicators – to alter exposure to equities. This allows it to also take advantage of shorter-term market movements. Three, it will use derivatives and not just debt to provide the hedge and maintain the fund’s ‘equity’ status.
This fund is ideally suited for those looking at valuations or trading metrics to alter their equity exposure. It will have a lower risk-return profile than regular equity funds and is therefore, suitable for conservative investors, or those looking to just kick-start their equity investments.
Punam Sharma and Suyash Choudhary will manage the fund.
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