The new scheme from Axis Mutual Fund will use hedging strategies to ‘manage’ risk
Axis Mutual Fund plans to launch a new scheme—Axis Dynamic Balanced Fund. This scheme will follow a new approach to dynamic investing. The new scheme will maintain its allocation to cash equity within the range of 65%-100% of the portfolio (similar to other balanced schemes). But, around 0%-65% will be invested in equity derivatives as a hedging strategy. Therefore, the net allocation towards equity will be around 0%-100%. The debt portion of the scheme will vary from 0%-30%. Similar to other balanced schemes, this scheme will seek capital appreciation by investing in a portfolio of equity or equity-linked securities while the secondary objective is to generate income through investments in debt and money market instruments. The difference here is that the scheme will ‘manage’ its risk by using hedging strategies.
In a recent issue of Moneylife magazine (Issue dated: 21 March 2013), we wrote how dynamic equity schemes try and time the market. These schemes vary their allocation to equity depending on either a proprietary method or on the price to equity ratio (P/E) of the Nifty index. Recently ING Mutual Fund filed an offer document to launch a scheme— ING Forward P/E Ratio Fund—which would vary its allocation based on the forward P/E of the index (Read: ING Forward P/E Ratio Fund: Another dynamic scheme with a new concept).
Fund managers try and lure investors with strategies that try and deliver superior returns by trying to predict the movement of the market. Unlike other equity schemes that invest a fixed proportion to equity, in dynamic schemes, the percentage allocated to equity is decided by the fund management. Therefore, if the fund management makes a wrong call, it would negatively impact returns. This scheme from Axis Mutual Fund will use derivative hedging strategies which involve high level of risk. Therefore, investing in this scheme may involve a higher risk compared to other balanced schemes.
Another aspect of dynamic schemes that we have covered in the past is that apart from getting the asset allocation right, the fund managers have to pick the right stocks as well. In this new scheme the fund manager would have to decide the right hedging strategy as well.
Axis Mutual Fund has a track record of just of three years in managing equity schemes. This is too short a period to comment on the fund management performance of the fund house. This new scheme will be managed by R Sivakumar and Jinesh Gopani, both of whom have an experience of over ten years in the industry.
Other details of the scheme:
50% S&P CNX Nifty + 50% CRISIL Composite Bond Fund Index
Minimum Application Amount
Rs5,000 and in multiples of Re1 thereafter
Minimum Additional Purchase Amount
Rs100 and in multiples of Re1 thereafter
3% if redeemed/switched out up to 6 months from the date of allotment
2% if redeemed/switched out after 6 months & up to 12 months from the date of allotment
1% if redeemed/switched out after 12 months & up to 24 months from the date of allotment.
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