PPFAS Mutual Fund, the 19th largest Asset Management Company (AMC), has applied to the Securities and Exchange Board of India (SEBI) for the launch of an open-ended dynamic asset allocation scheme. This move marks a departure from the standard practices of other fund houses, as PPFAS Mutual Fund currently offers only five schemes: Parag Parikh Arbitrage, Parag Parikh Conservative Hybrid, Parag Parikh ELSS Tax Saver, Parag Parikh Flexi Cap, and Parag Parikh Liquid Fund.
What is Dynamic Asset Allocation
Dynamic asset allocation involves adjusting the mix of financial assets in a portfolio based on current trends in the economy or stock market. The goal is to respond to existing risks and opportunities, aiming to achieve returns that surpass a specified benchmark. The aim of dynamic asset allocation is to respond to current risks and opportunities and achieve returns that exceed a targeted benchmark.
These are a type of hybrid mutual funds that implement this strategy by frequently changing the allocation between equity & debt depending on the market conditions.
Dynamic asset allocation funds may offer the following advantages:
Performance Boost
By investing in the best-performing asset classes, these funds aim to maximise exposure to momentum.
Diversification Strategy
Dynamic asset allocation introduces portfolio diversification by exposing a portfolio to various asset classes. Portfolio managers may allocate funds to equities, fixed interest, mutual funds, index funds, currencies, and derivatives. This diversified approach helps manage risk effectively.
Dynamic asset allocation funds may also have some limitations, such as:
Active Management
Actively adjusting portfolio allocations to meet changing market conditions takes time and resources. Dynamic asset allocation funds may have higher fees and expenses than passive funds that follow a fixed allocation.
Taxation
Dynamic asset allocation funds may generate higher capital gains taxes than passive funds due to the frequent buying and selling of securities.
Unique Offering in a Limited Scheme Portfolio
Unlike its counterparts, PPFAS Mutual Fund distinguishes itself by maintaining a limited number of schemes. As of the September quarter, the AMC boasted an average assets under management (AUM) of Rs 45,608 crore. The proposed dynamic asset allocation scheme aligns with the company’s strategy to diversify its offerings.
Emphasis on Dynamic Asset Allocation Category’s Popularity
Dynamic Asset Allocation (DAA) or Balanced Advantage Fund (BAF) is a sought-after category in the Rs 50 trillion Indian mutual fund industry. The total assets under management (AUM) for this category reached Rs 2.22 trillion by the end of November, encompassing 29 schemes. PPFAS Mutual Fund aims to tap into this popular category with its new offering.
Parag Parikh Dynamic Asset Allocation Fund’s Investment Strategy
The proposed Parag Parikh Dynamic Asset Allocation Fund is designed to invest in a combination of equity, debt, and units issued by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). The performance of the scheme will be benchmarked against CRISIL Hybrid 50+50 – Moderate Index, reflecting the fund’s commitment to delivering competitive returns.
Tax Efficiency and Exit Load Considerations
To enhance tax efficiency, the Balanced Advantage Fund (BAF) ensures an allocation of at least 65 percent to equities. This allocation strategy facilitates long-term capital gains treatment for investors, subject to a 10 percent tax on gains exceeding Rs 1 lakh. Additionally, an exit load of 1 percent will be applicable for redemptions or switches within one year from the date of allotment, after which no exit load will be charged.
Proven Performance of DAA/BAF Schemes
Historical data from Value Research reveals that Dynamic Asset Allocation (DAA) or Balanced Advantage Fund (BAF) schemes have delivered impressive returns. Over a one-year period, these schemes recorded a 19 percent return, while achieving 12 percent returns each on a three-year and five-year basis. This performance underscores the potential benefits of this category for investors.
Adaptive Allocation Based on Market Conditions
A distinguishing feature of Balanced Advantage Funds (BAFs) is their ability to dynamically adjust asset allocation between equity and debt in response to changing market valuations and economic conditions. This adaptive approach aims to optimize returns for investors in varying market scenarios.
However, balanced advantage funds may also have some drawbacks, such as:
• Complexity: Investors may find it difficult to understand and monitor the fund’s performance and risk profile.
• Cost: Balanced advantage funds may have higher costs and expenses than other hybrid funds due to frequent trading and arbitrage activities.
Conclusion
PFAS Mutual Fund is taking a bold step by applying for SEBI approval for a dynamic asset allocation scheme. This scheme will offer investors a unique opportunity to benefit from the fund’s expertise and experience in managing a limited portfolio of schemes. However, investors should also be aware of the limitations of dynamic asset allocation, such as complexity, cost, and active management.
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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.