Parag Parikh, Dynamic Asset Allocation Fund, is an open-ended dynamic asset allocation fund launching on Feb 20th. We discuss who can consider investing in the fund.
According to the scheme flyer, “The fund will predominantly invest in debt instruments and endeavour to maintain equity allocation between 35% and 65%* (some of it will be hedged via approved derivative instruments as permitted by SEBI from time to time)”.
* The fund can, in principle, change equity allocation from 0 to 100%
The flyer also says: “We recommend it to those:
- Desiring debt allocation with indexation benefits
- Preferring to outsource the task of managing the complexities involved in debt investing.
- Who refrain from actively trading in debt securities with the intention of profiting from interest-rate movements.”
The scheme can invest in all types of debt securities like Sovereign, State Government, PSU and corporate securities across all maturities – (including securitised debt) and money market instruments.
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The bond holdings can be both ‘accrual’ and ‘duration’ based. That is both short-term debt, which is held until maturity and long term debt, which can be traded mid-way for capital gains or as per market conditions.
According to the flyer, the equity investments will (a) focus on choosing stocks possessing a ‘margin-of-safety’, (b) prefer stocks with strong cash flows (higher Income Distribution cum capital withdrawal payout/buybacks), and (c) avail ‘special situations’ as well as arbitrage opportunities whenever they arise.
Context: In March 2023, govt announced several amendments to the finance bill 2023. Among the changes is the change in taxation status for debt mutual funds. Funds holding less than or equal to 35% equity will be taxed as per slab, regardless of the age of the MF unit sold.
This makes AMC’s earlier offering, Parag Parikh Conservative Hybrid Fund, always taxable as per slab. I expected the AMC to change the mandate of the conservative hybrid fund to make it tax-friendly.
Gains from funds holding less than 65% Indian equity but more than 35% Indian equity purchased on or before 3Y are short-term gains and taxed as per slab, and gains from older units are taxed at 20% with indexation (long-term capital gains).
However, they have opted to launch the Parag Parikh Dynamic Asset Allocation Fund for reasons known only to them. The NFO will still be a debt fund with indexation benefits for long-term capital gains.
Who should invest in the Parag Parikh Dynamic Asset Allocation Fund?
Investors should know that Parag Parikh Dynamic Asset Allocation Fund will be volatile considering its long-term bond and equity holdings. So, while it may occasionally give exceptional returns, it may not last long. Therfore, the fund is recommended only for long-term holding.
- Those far from retirement and already investing in their conservative hybrid fund may consider Parag Parikh Dynamic Asset Allocation Fund a tax-friendly alternative (see below for my decision), although it may or may not be an exact match in strategy. The main difference (aside from variable asset allocation) is the new fund cannot invest in REITs/InvITs.
- Also, the scheme’s benchmark is the CRISIL Hybrid 50+50 Moderate Index. So, this may hold higher unhedged equity than the conservative hybrid fund. We recommend retirees invested in their conservative hybrid fund wait and watch for a few months before taking a call on shifting. If the equity allocation is higher, we do not recommend a shift.
- Experienced investors can watch the fund’s portfolio for a few months and consider this for their long term portfolios.
- We do not recommend using it for short-term goals – less than five years.
- New investors must not be in a hurry to invest. They can wait and see the portfolio and performance (risk and returns) for a while before considering it.
My plan: Readers may know I am invested in the Parag Parikh Conservative Hybrid Fund. See: Why I started to invest in Parag Parikh Conservative Hybrid Fund. I continued to invest in the fund after the March 2023 taxation amendment mentioned above.
I will now divert fresh investments into the Parag Parikh Dynamic Asset Allocation Fund to reduce my tax burden without too much change in the investment risk profile. I want to caution readers that this move is suited to my circumstances. This is neither a recommendation nor an endorsement. Kindly review your circumstances before investing.