Want to time the market with Nifty PE? Learn from Franklin Dynamic PE Fund

Do you wish to time the market using Nifty PE ratio? Here are some lessons from Franklin India Dynamic PE Ratio Fund of funds – a mutual fund that has been timing the market with the NIfty PE for almost 15 years. Is it possible to reduce the risk in a portfolio and enhance its return at the same time? Many people naively believe that it is possible to do this by timing the market and the Nifty PE ratio is one such market timing tool. They say this is “intuition”, “common sense to buy low and sell high”. Well before you start dreaming based on that, have a look at some evidence.

Well, I agree that it is more than possible to reduce risk and enhance return at the same time. However, it is not always possible to do this. Meaning the associated probability is less than 100%. Let us find out how much less and the associated effort in this post – not by a backtesting strategy where I can pick and choose parameters in hindsight. Instead, let us learn from a mutual fund that has been doing this in real time for almost 15 years (come Nov. 2018).

A mutual fund has the means and resources to time the market like a machine using a set algorithm. There is no emotional aspect involved because they are doing so with our money and not theirs. This makes studying their results all the more important. At least in this aspect (systematic timing), it is pretty hard for an individual investor working with their own money to beat a fund manager. So if someone comments after seeing Franklin Dynamic PE results, “they would have got more returns, if they had used different PE bands”, excuse me for not taking them seriously.

The most important advantage a mutual fund has is the taxation benefit. They do not have to pay capital gains tax and can afford to tactically rebalance as often as every month. This is simply not practical for individuals as they will have to pay LTCG on equity as well.

Before we proceed, it is important to recognise that Franklin Dynamic PE is a fund of fund. This means that it is a mutual fund that invests in other mutual funds (not ETFs). Unfortunately, this is still considered a non-equity mutual fund by the taxman. So capital gains before 3Y from the date of purchase will be taxed as per slab and beyond 3Y at 20% with indexation of the purchase price. A fund of fund also has a “double expense ratio” – one for the funds it invests in (usually direct funds) and the second for the investment strategy. This makes a bit expensive.

Recent entrants to this tactical asset allocation space do not suffer from both these drawbacks. Funds like IDFC Dynamic equity fund, MOST Dynamic equity and DSPR dynamic equity to name a few, use arbitrage instead of fixed income for tactical asset allocation and they directly buy and sell securities. So they are equity funds with 15% STCG (<=1Y) and 10% LTCG above 1 lakh after 1Y. These are too young to study, but I am willing to bet that their performance should be similar to Franklin Dynamic PE after a few years.

For the purpose of this post, we shall ignore the taxation of Franklin Dynamic PE fund when we compare its returns with NIfty 50 (Total returns – including dividends). The total expense ratio is factored in as NAV is always after expenses. We shall also compare risk (as measured by standard deviation of monthly returns) with Nifty 50 (TRI). The expenses associated with an investment with NIfty 50 will be ignored.

Tools used in this study: The rolling standard deviation tool for evaluating volatility in returns. This also has a rolling returns tool built in. You can also use the latest version of the Mutual Fund Rolling Returns Analyzer.

Want to try timing the market yourself? Use Nifty Valuation Analysis with PE, PB, Div Yield, ROE, EPS of 21 NSE Indices

Previous posts on market timing published at freefincal

Relevance of the Nifty PE for the long-term investor

Misconceptions about the Nifty PE

Is PB-based investing better than PE-based investing?

Is it possible to time the market?

Nifty 200 DMA: Buying High vs Buying Low

Buying “low” with “active” cash vs buying systematically: still a surprise!

Equity: Buying “High” vs Buying “Low”

Investment Strategy of Franklin Dynamic PE Fund of fund

In the first week of each month, they check the closing Nifty PE of the previous month. Then they decide the equity: debt(fixed income) asset allocation as per the following table. Source: Scheme information document.

Franklin Dynamic PE Fund of Fund Investment stategy

Here equity represents an investment typically in Franklin Blue Chip Fund, and debt typically Franklin India Short Term Income Plan. There are provisions in the scheme document to change the PE bands, invest in 100% cash, direct insecurities, in other funds of Franklin when the AUM of this fund represents more than 20% of the AUM of the underlying funds. Let us not worry about that too much here and assume that since inception on 31st Oct 2003, the fund has been following a PE based tactical asset allocation reasonably close to the above table.

You will see below graphs of rolling return and rolling risk for different durations. Rolling return implies that from Oct 31st 2003 to Mar 32rd 2018, we consider all possible 3Y,5Y,7Y and 10Y durations. Rolling risk implies for the same period, we consider the how much monthly returns deviation from their average for every possible 3Y,5Y, 7Y and 10Y periods.

Market timing with Nifty PE: Rolling return and risk over three years

market timing with nifty PE: three year performance - risk and reward

Return outperformance consistency: 54.2%. The fund beat Nifty 1585 out of 2922, 3Y periods considered.

Risk outperformance consistency: 100%

Market timing with Nifty PE: Rolling return and risk over five years

market timing with nifty PE: five year performance - risk and reward

Return outperformance consistency: 46%. The fund beat Nifty 1111 out of 2405, 5Y periods considered.

Risk outperformance consistency: 100%

Rolling return and risk over seven years

Return outperformance consistency: 64.5%. The fund beat Nifty 1215 out of 1884, 7Y periods considered.

Risk outperformance consistency: 100%

Rolling return and risk over ten years

market timing with nifty PE: 10 year performance - risk and reward

Return outperformance consistency: 61%. The fund beat Nifty 673 out of 1102, 10Y periods considered.

Risk outperformance consistency: 100%

Rolling return and risk over thirteen years

market timing with NIfty PE 13 year performance

Return outperformance consistency: 33%. The fund beat Nifty 112 out of 337, 13Y periods considered.

Risk outperformance consistency: 100%

Analysis: How has Franklin Dynamic PE fund fared?

The fund has performed brilliantly. It has offered returns similar to NIfty TRI at about half the risk! The return per unit risk of the fund is about twice that of NIfty. You simply cannot ask for anything more. Market timing with Nifty works! Oh what is that sound I hear? Is that you saying, “but market timing with PE has got more returns than the NIfty one about 50% of the time?”

There, there, child. Welcome to the real world where common sense and intuition often fails because lazy people do not look at real data, form half-baked opinions and sound like they know it all. Please recognise that market timing strategies are for reducing risk and Nifty PE timing does this with 100% probability. If you thought reducing risk will also increase returns, then time to wake up and smell the coffee!

Market timing works but not as often as we want it to!

Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media


Do check out my books


You Can Be Rich Too with Goal-Based InvestingYou can be rich too with goal based investing

My first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create customg solutions for your lifestye! Get it now . It is also available in Kindle format .

Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want

Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you want
My second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a youngearner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This 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)

Create a "from start to finish" financial plan with this free robo advisory software template


Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too" are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

7 thoughts on “Want to time the market with Nifty PE? Learn from Franklin Dynamic PE Fund

  1. sir, In plain terms are you saying that timing using Nifty PE is a tool to reduce risk than increase returns? So at max one can expect Nifty like returns by doing this…is my understanding correct?

  2. Sir,

    Can we conclude that investors having low appetite for risk or don’t believe on high risk=high return concept should include this fund or any fund of funds ?????

  3. Not able to get the essence of this..
    While reducing risk theoretically does happen, how does it help the retail investor? Should this give more confidence to invest a bigger amount? Or is such an option give better “downside protection”, thus allowing for slightly better flexibility to remove money out?

  4. Standard deviation would include upside also. I would like to compare only downside risk. e.g. if X,Y are NAV values at tx and ty time with ty > tx, then I consider only those data points where Y – X < 0. basically I am also interested in a ratio that measures erosion of capital.

Comments are closed.