Last Updated on January 3, 2022
This is a review of Motilal Oswal Dynamic Fund, an open-ended dynamic asset allocation fund which uses the Motilal Oswal Value Index (MOVI), a proprietary index, to determine direct equity exposure. The fund was launched in Sep 2016 and has an AUM of Rs. 1293 Crores at the time of writing.
The low AUM is probably because of the market up-swing during most of this period. Investors recognise the value of hybrid funds only the markets fall while it would be a good idea to use them as a core portfolio holding: Why Aggressive Hybrid (balanced) Mutual Funds score over diversified funds
MOVI used by Motilal Oswal Dynamic Fund is based on a combination of Nifty PE, PB and Dividend Yield. This index has been analyzed in detail before: Deconstructing the Motilal Oswal Value Index (MOVI) and therefore only key points will be discussed here. A backtest of using the MOVI for timing the market is also available: Market Timing with the Motilal Oswal Value Index (MOVI). The index historical data is maintained at the AMC site
The fund will increase equity allocation if the market valuation appears cheap (as per the MOVI) and decrease equity allocation if expensive. According to AMC’s scheme presentation, this is not the same as market timing! Which is quite baffling, to say the least. It even has this quote:
Timing the market is a fool’s game, whereas time in the market is your greatest natural advantage – Nick Murray
When a fund changes equity allocation depending on market conditions, it does not exactly practice “time in the market” does it?
It is also surprising that the AMC chooses to downplay the dynamic asset allocation part in its investment objective and use standard jargon:
The investment objective is to generate long term capital appreciation by investing in equity and equity-related instruments including equity derivatives, debt, money market instruments and units issued by REITs and InvITs
A look at this alone, one will assume this is just another diversified equity-oriented fund.
Motilal Oswal Dynamic Fund: Key Attributes
- Asset Allocation as determined by MOVI levels (see below)
- Minimum direct equity (without derivative positions) will be 30%
- Equity (including derivatives) exposure will range from 65% to 100%
- Derivatives (arbitrage) exposure: up to 35%
- Bonds up to 35% (Government Securities,
Corporate Debt, Other debt instruments and Money
Market Instruments) - REITs and InvITs up to 10%
- Rebalancing frequency: Twice a month.
- Benchmark: CRISIL Hybrid 35+65 – Aggressive TRI
Asset Allocation Strategy
As mentioned above, the fund uses a propriety index maintained by the NSE called the MOVI. It combines the 30-day moving average of the Nifty PE, PB and Dividend Yield (see article link above for approximate formula). This is the asset allocation chart sourced from the scheme document.
Historical Asset Allocation
The historical asset allocation pattern of the fund is shown below.
Historical Asset Type Allocation
The asset allocation history plotted above can be broken down into direct equity (long positions), derivatives (arbitrage, which is shown above 100%) and the types of bonds held.
Market Cap Allocation History
So far the fund has had a strong large cap tilt although it has no cap or sector restrictions.
Bond Type History
The fund has less than AAA quality bonds but considering the low overall bond allocation, this should not be a worrying factor.
Bond Maturity Profile History
The Fund seems to have increased short-term bond holdings after early 2018 (after the SEBI categorization rules)
Performance of Motilal Oswal Dynamic Fund
The NAV growth of Motilal Oswal Dynamic Fund, ICIC Pru Balanced Advantage Fund (PB-based), Franklin Dynamic Asset Allocation FOF (PE-based), Nifty 100 and CRISIL Hybrid (65% equity) is shown below.
Motilal Oswal Dynamic has noticeably lower volatility than the two indices. Since inception, it also has a marginally higher volatility than ICIC Balanced Advantage. The Franklin fund has the lowest volatility (as measured by the standard deviation of daily returns) but also the lowest return (it is also taxed like a debt fund).
Summary
Motilal Oswal Dynamic Fund has a balanced risk and reward when compared with the NIfty 100 since inception. It can be considered by investors with a mature approach to portfolio management with high-risk management expectations and low return expectations. It can be used for long-term goals, ten years or more with suitable asset allocation considerations.
The MOVI strategy is not particularly superior to using PE or PB metrics alone, but compared to the ICICI fund, the AUM here is quite low and unlikely to swell as fast. Compared to the Franklin PE-based FOF the risk is higher but taxation is favourable making it a reasonable long-term choice. However, it will have to be held in significant proportion in order to make a difference.
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