The new scheme from DSP BlackRock (DSPBR) mutual fund will dynamically manage the asset allocation between equity schemes and debt schemes of DSP BlackRock based on the relative valuation of equity and debt markets

Dynamic schemes are attempts at market-timing. These plans free fund managers from the constraints of having a high allocation to equity at all times. They can invest the assets of the portfolio in equity or debt according to their market sense or a valuation-based formula. DSPBR Dynamic Asset Allocation Fund sets the asset allocation of the portfolio based on a formula which determines the relative attractiveness of equity and debt markets.

The factor that would be used for determining the asset allocation for DSPBR Dynamic Asset Allocation Fund is the yield gap ratio, which is the ratio of debt market yield to equity market yield. The 10-year government security (G-sec) yield is used as the proxy for debt market yield, while earnings yield of equity markets is simply the reciprocal of the Nifty price/earnings ratio. By evaluating the ratio of these two yields, the fund manager can assess whether equity markets are overpriced or underpriced relative to debt markets. The model also considers the modified yield gap ratio, which uses one-year G-sec yield in the numerator. A higher ratio would signify that the earning from debt will be higher, thus the equity allocation would reduce and debt allocation would increase.

If the difference between the yield gap ratio and the modified yield gap ratio is less than 0.05, which is an indicator of a flat yield curve, then allocation bands based on a moderate version of the yield gap, called the modified yield gap. Below is the description of the formula and the allocation bands as given by DSPBR mutual fund:

How would the allocation have worked in the past based on the model? We plotted the equity allocation as recommended by the yield gap model of DSPBR to the Nifty index and the 10-year G-sec bond yield over the period from November 2000 to December 2013. Here is how it would have worked:

As you can see from the chart, the allocation towards equity reduces significantly as the market peaks towards the end of 2007. The equity allocation increases as the debt yields fall considerably and the equity market begins another rally. For a majority of the past three years period when the equity market has remained volatile and flat, the formula has suggested a higher allocation to debt investments.

By investing in a dynamic scheme, you not only expect the fund managers to maintain perfect asset allocation, based on the market valuation, you also expect them to pick the right stocks. Doing both together is a fairly difficult task. Here the performance of this scheme would depend on the asset allocation based on the formula and the stock picks of the underlying schemes. Poor stocks selected by an underlying scheme can weigh down the performance of this scheme. As this is a fund-of funds scheme, long-term capital gains will be taxable.

The underlying schemes for equity allocation would be DSPBR Equity Fund and/or DSPBR Top 100 Equity Fund and/or DSPBR Focus 25 Fund and/or DSPBR Opportunities Fund and/or DSPBR India T.I.G.E.R Fund whereas the Underlying Schemes for debt allocation would be DSPBR Strategic Bond Fund and/or DSPBR Short Term Fund and/or DSPBR Money Manager Fund and/or DSPBR Banking & PSU Debt Fund and/or DSPBR Income Opportunities Fund.

Performance of dynamic schemes is difficult to be judged as there is no such index to benchmark their performance. But given their flexibility they are expected to perform better than other schemes or at least give positive returns.

The table below gives the performance of a systematic investment in the scheme:

The scheme would be managed by Apoorva Shah, who has over 24 years of experience in banking and investments and Dhawal Dalal, who has over 14 years of experience in fixed income fund management, research and trading.

Other details of the scheme

Minimum Application Amount

(First purchase during New Fund Offer and continuous/ongoing Offer)

Rs5,000/- and multiples of Re1/- thereafter

Minimum Application Amount

(For subsequent purchase) Rs1,000/- and multiples of Re1/- thereafter

Minimum instalment for SIP Rs500/-

Terms of allocation:

A. Equity Allocation:

1. The Scheme will primarily allocate its fund in the units of DSPBR Equity Fund (DSPBREF) and DSPBR Top 100 Equity Fund (DSPBRTEF).
 

2. In case the allocation of the Scheme reaches 20% of the net asset value of DSPBREF and 20% of the net asset value of DSPBRTEF, then the Scheme will allocate the remaining funds in units of DSPBR Focus 25 Fund and/or DSPBR Opportunities Fund and/or DSPBR India T.I.G.E.R Fund in such a manner that allocation to these schemes do not exceed 20 % of the net asset value of each of the respective schemes.
 

3. In case allocation to each of the schemes (referred in point 1 and 2) reaches 20 % of the respective net asset value, then fresh subscription/switches into the Scheme would be suspended.

B. Debt Allocation:

1. The Scheme will primarily allocate its fund in the units of DSPBR Strategic Bond Fund (DSPBRSBF) and DSPBR Short Term Fund (DSPBRSTF).
 

2. In case the allocation of the Scheme reaches 20% of the net asset value of DSPBRSBF and 20% of the net asset value of DSPBRSTF, then the Scheme will allocate the remaining funds in the units of DSPBR Money Manager Fund and/or DSPBR Banking & PSU Debt Fund and/or DSPBR Income Opportunities Fund in such a manner that allocation to these schemes do not exceed 20% of the net asset value of each of the respective schemes.
 

3. In case allocation to each of the schemes (referred in point 1 and 2) reaches 20% of the respective net asset value, then fresh subscription/switches into the Scheme would be suspended.

Exit load

Holding Period from date of allotment:

• Less than or equal to one year: 1%

• Greater than one year and less than or equal to two years: 0.5%

• Greater than two years: Nil

Benchmark Index CRISIL Balanced Fund Index