Axis Dynamic Equity Fund is yet another dynamic equity fund that proposes to tactically change its asset allocation to reduce risk (with no guarantee that the backtesting will work in the future). When Anish Mohan sent me the funds KIM*, his description piqued my interest to look deeper. Here is a description of its strategy. a backtest followed by a discussion.
Announcement: Travel to Europe at 40-50% lower air fares!!
Pranav Surya just posted in AIFW that "Oman Air + Lufthansa are running a fantastic promotion for cities to travel from Delhi". If you want to avail such huge discounts (eg. Delhi to Berlin only Rs. 23K) , follow the steps pointed out in our new book: GameChanger (Rs. 199 hardcover; Rs. 99 Kindle). Additional tips are available in the Travel Training Kit (Rs. 199)
- KIM = Key information Memorandum. SID = Scheme Infomation Document. The KIM contains the essentials about the fund. The SID tells you all possible risks and legal wording to safeguard the AMC. Looking for a book to learn about mutual funds, just download the SID of any fund and read it end to end.
Announcement: Venkatesh Jambulingam has been kind enough to translate few of my posts in Tamil. Please support his work by sharing it. Latest posts:
First, it is important to "place" the fund. I would recommend reading this classification post: Dynamic Mutual Funds vs Balanced Mutual Funds. Here is a picture from the post.
Strategic asset allocation is trying to keep the asset allocation fixed at all times (rebalanced every month or so). Tactical asset allocation refers to (in this context), reducing equity exposure when markets are "overheated" and increasing it when they "cool" down.
I had earlier done an investment strategy analysis of Investment Strategy Analysis: IDFC Dynamic Equity Fund when it was an NFO. And now, I see it not exactly doing well. This fund uses 200 days daily moving average + Nifty PE to tactically asset allocate.
Then came a fund from Motilal Oswal, which led to this: Do not invest in dynamic equity funds if you wish to chase returns
Earlier I had also studied the performance of Dynamic Asset Allocation Mutual Funds.
The only reason I decided to backtest Axis Dynamic Equity funds strategy is that it was complex - amusingly so. So when you backtest, it is fun and you learn a thing or two. This post is NOT an advertisement for the fund. In fact, I am quite clear that one should not invest in this or any other such fund even before I started. Yeah, call me prejudiced, but my portfolio hates clutter and it thanks me.
Take a deep breath and read on.
None of the below numbers and rules are justified in the SID and supposed to be a "proprietary in-house quantitative approach". This means, "we won't tell you what it exactly is other than rosy results". So I will not take it too seriously.
Every 40 business days, the fund
Step 1: Check the trailing 30-day standard deviation of Nifty 50 daily returns.
If this is > 17% define it as a time of high volatility
<= 17% is a time of low volatility
Each red dot represents the volatility reading every 40 days. Obviously, there is no clear demarcation. It swings back and forth!
Step 2: Then it would calculate two quantities of the Nifty 50:
Diff = 90-day daily moving average - 15-day-daily-moving-average
Rate = rate of change of the 90-day moving average
If Diff < 0 AND Rate > 0% ----> period of high (market) trend
If Diff >0 AND Rate <= 0%
If Diff <=0 AND Rate > 1% ----> period of Mid trend
If Diff >=0 AND Rate <= 1% ----> period of Low trend
Do I here you go "what the ****". Hang on. There is more!
I could not find a mid-trend. Eight observations had no specified trend.
Step 3: Once volatility and trend are determined, it allocated direct stocks (both Indian and International) according to this matrix. Here PE is the Nifty trailing PE
Then it would fix the fixed income asset allocation as per this
The difference between direct equity exposure and fixed income (short-term bonds including money market and some REITs) will be covered by arbitrage.
Therefore, the fill will remain an equity fund at all times from the tax point of view.
Step 4: Once the asset allocation is determined (this is known as a top-down approach), the stocks will be actively chosen (aka bottom-up approach).
The AMC obviously did a back-test for a nice presentation slide. Mutual funds can only be sold with outperformance. No one will buy a fund that claims to reduce risk at the cost of returns (although it would be a smart choice)
Source: Axis Dynamic Fund Presentation
This is the SID: Axis Dynamic Fund Scheme Information Document
This is the KIM
I ran this backtest without considering any arbitrage position. I tool Nifty 50 TRI as the equity universe and Franklin India Income Builder Fund as the fixed income universe. It is an arbitrary choice and I just did inky pinky. Debt mutual funds irritatingly change colour from time to time. So I have no idea what kind of bonds this fund help from July 1999 onwards.
I only used the equity allocation matrix and the rest was in the debt fund. So this is what I got. It is not identical, but the resemblance is good enough.
I know what you are thinking. Are such complexities necessary? No, they are not!
Have a look at the direct equity allocation after every 40 days. It is not exact, but close enough in my opinion. I have chosen the lower equity percentage in the matrix.
First of all, the fund wants to change equity allocation so much to reduce risk and not beat the Nifty. And considering that definition of "high PE" and "low PE" keep changing after each business day, I doubt if it will replicate the above outperformance in future.
I was curious if an individual investor can try this kind of risk reduction. However such dramatic changes in asset allocation every 40 days is a bit too much. The fund can do it as it will not have to pay tax or exit load. It will have to pay brokerage though.
After all this gymnastics, the fund wants to benchmark itself against Crisil Balanced Fund Index! I interpret this as a lack of confidence on the part of the AMC to be able to beat (higher absolute returns) the Nifty price index (forget TRI) in future.
No, thank you. I will take my chances with a simple equity-oriented balanced fund and live with whatever risk reduction a strategic asset allocation offers me.
Thanks to Anish for sending me the funds KIM.
Ask Questions with this form
And I will respond to them in the coming weekend. I welcome tough questions. Please do not ask for investment advice. Before asking, please search the site if the issue has already been discussed. Thank you. PLEASE DO NOT POST COMMENTS WITH THIS FORM it is for questions only.
GameChanger- Forget Startups, Join Corporate & Live The Rich Life You want
My second book, Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you want, co-authored with Pranav Surya is now available at Amazon as paperback (₹ 199) and Kindle (free in unlimited or ₹ 99 - you could read with their free app on PC/tablet/mobile, no kindle necessary).
It is a book that tells you how to travel anywhere on a budget and specific investment advice for young earners.
The ultimate guide to travel by Pranav Surya is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for ₹199 (instant download)
You can Be Rich Too with Goal-Based Investing
My first book with PV Subramanyam helps you ask the risk questions about money, seek simple solutions and find your own personalised answers with nine online calculator modules.
The book is available at:
Amazon Hardcover Rs. 271. 32% OFF
Infibeam Now just Rs. 270 32% OFF. If you use a mobikwik wallet, and purchase via infibeam, you can get up to 100% cashback!!
Flipkart Rs. 279. 30% off
Kindle at Amazon.in (Rs.271) Read with free app
Google PlayRs. 271 Read on your PC/Tablet/Mobile
Now in Hindi!
Order the Hindi version via this link