ICICI dynamic fund has now become a mutli-asset fund. Is this a huge change from an equity to a debt fund? Should you now consider exiting or hold on? If you download the ICICI Mutual Fund Notification for changes in its hybrid and its equity scheme you might notice some amusing patterns. For eg. (1) ICICI Select Large Cap is now Focused Equity and it is investment objective is to invest in “30 companies across market capitalization i.e. focus on multicap.”. (2) ICICI Multicap fund now has an objective to invest “across large cap, mid cap and small cap stocks of various industries.” (3) ICICI Top 100 is now ICICI Large and Midcap but can hold up to 30% of other than large and mid-caps (and 30% debt). So that is a total of three multicap funds after conforming to SEBI categorization! And I thought it would be easy to build a diversified portfolio now!
Of course, these multicaps have nothing to do with ICICI Dynamic but I could not resist pointing that out. Let me now get to the business at hand: ICICI Dynamic fund is one of the funds in my watchlist. It is a quiet and consistent performer that outperforms the index when the market is heading south. This is because it can invest in a considerable amount of fixed income (debt or bonds).
How was this achieved? Shankaren Naren and team uses a price to book value PB based tactical asset allocation model to determine equity:debt ratio. See: Is PB-based investing better than PE-based investing? As will all other tactical models if the metric show an overvalued market and it does not come down, the fund will underperform peers. So this fund is those who want steady returns with lower than index volatility – so my kind of fund!
Most investors make the mistake of taking VR or Morningstar or Crisl classifications seriously. The data in the first para is evidence that even the new SEBI classification should be taken with a bag of salt. So these rating portals classified ICICI dynamic as equity fund (both VR and M* call it mutlicap or flexicap). It is important not to get mislead by this. Rating portal classification by definition and like their silly star ratings are variable. Funds can and have changed categories in a month.
ICICI Dynamic never had any mandate to be an equity fund at all times. It could always swing from 100% equity to 100% debt depending
after considering the prevailing market conditions, the macro economic environment (including interest rates and inflation), the performance of the corporate sector, the equity markets and general liquidity and other considerations in the economy and markets. The AMC may choose to continuously churn the portfolio of the Scheme in order to achieve the investment objective. This Scheme will trade actively in the capital market. The AMC will have the discretion to take aggressive asset calls i.e. by staying 100% invested in equity market/equity related instruments at a given point of time and 0% at another, in which case, the Scheme may be invested in debt related instruments at its discretion. Given the nature of the Scheme, the portfolio turnover ratio could be very high and AMC may change the full portfolio from say all Equity to all Cash and/ or to all Long /short term Bonds, commensurate with the investment objectives of the Scheme. OLD Scheme information Document
Even though it had this flexibility, the AMC classified it as a “long-term wealth creation solution”.
So what has changed now that ICICI Dynamic will become ICICI Multi-asset fund?
To understand such scheme changes first look at the change in the benchmark (if any) in the circular (not elsewhere!). ICIC Dynamic has NIfty 50 as a benchmark. ICIC Dynamic has Nifty 50 (80%), CRISIL Liquid Fund Index (10%), LBMA AM
Fixing Prices* (10%)
* LBMA London Bullion Market Association and AM fixing price refers to the price of gold fixed in the morning (10: am London time, 3 pm IST).
Next look at how the AMC is pitching the new fund:
Old pitch: This product is suitable for investors who are seeking: Long-term wealth creation solution with a diversified equity fund that aims for growth by investing in equity and debt (for defensive considerations)
New pitch: This product is suitable for investors who are seeking Long-term wealth creation with an open-ended scheme investing in at least three asset classes with a minimum allocation of 10% to each asset class
On the face of it, the change seems significant. The AMC has changed a “diversified equity fund” to something that will have at least 10% of stocks, bond and gold(or REITs). Now the AMC can only swing respective asset allocations from 80% to 10%. However, if you compare the investment strategies in the above circular it is clear that the core policy remains the same. The revised benchmark still has 80% of Nifty 50. So it is unlikely for the AMC to beat such a benchmark over 5+ years unless it has a significant amount of stocks in the folio.
So my feeling is that ICICI Multi-asset fund is likely to an equity fund (from tax pov) more often than not. However, when you redeem if the average last 12-month equity holding is less than 65% then it will be classified as a debt fund by the taxman. Read more: Should I pay tax if my “equity” mutual fund holds less than 65% of equity?. Please note: this is not new, such a possibility existed even in the old fund!
What should I do? If you an existing ICICI Dynamic investor, ask yourself why did you pick this fund in the first place? If was because of its ability to lower volatility, that it is likely to continue if you stay put. If you wanted quick returns this fund will not help. If you are worried about tax, this fund will not help. If you have a long-term goal, value downside protection more, can handle underperformance over the short-term, can ignore star ratings peer comparisons, then staying put makes sense. Meaning this fund will not please DSP nanocap fans.