Timing the exact entry or exit into markets is no easy task, more so for retail investors. This is where dynamic equity-oriented funds that follow in-house models to gauge market valuations, offer good cover for investors in volatile markets.

Dynamic equity funds juggle deftly between equity and debt, depending on how overvalued or undervalued the market is. These funds allocate less to equities when market valuation appears expensive and more when it is cheap. To switch efficiently between equity and debt, fund houses take into account parameters such as price/earnings, price/book or dividend yield to decide the cut-off level.

ICICI Pru Dynamic Fund has a sound track record of delivering healthy returns over the long run. This fund has beaten both the category and benchmark over a five-year period, clocking 16 per cent annualised return.

Category outperformer

There are eight funds — Edelweiss Absolute Return, HSBC Dynamic, ICICI Pru Dynamic, IDFC Dynamic Equity, Invesco India Dynamic Equity, L&T Dynamic Equity, Motilal Oswal Most Focused Dynamic Equity and Tata Equity P/E — that follow dynamic allocation strategy, the equity portion forming 65-100 per cent of the portfolio. On the risk and return matrix, this category of funds lies between balanced equity-oriented funds and large-cap equity funds.

Dynamic equity funds may not deliver returns at par with diversified equity-oriented schemes during market rallies, as the latter gain from being fully invested in equity. But for investors with medium risk appetite, dynamic funds offer stable returns, with lower volatility.

The funds in the category may tend to generate varying returns given their different approach. For instance, ICICI Pru Dynamic Fund uses price/book to gauge the market, while Motilal Oswal Focused Dynamic Equity takes into account price/earnings of the market.

Performance

ICICI Pru Dynamic Fund’s performance has been notable across market cycles.

Thanks to the dynamic allocation, the fund has not only managed to deliver decent returns during market rallies but also cushion the fall well during market downturns.

Portfolio

ICICI Pru Dynamic fund follows multi-cap approach of investing across segments. However, the fund portfolio has tilted towards large-caps most of the time.

A higher price-to-book value than the fair value triggers an increase in cash levels and vice versa.

Over the last three years, equity allocation has ranged between 72 per cent and 95 per cent. The top three sectors, according to the latest portfolio, are banks, telecommunication services and power.

During the last one year, the fund manager raised exposure in sectors such as telecom services (to 8.7 per cent from 1.4) and chemicals (to 6.7 per cent from 0.4) and pared holdings in oil (to nil from 7.1 per cent), banks (to 10.7 per cent from 16.7) and non-ferrous metals (to nil from 5.8 per cent).

The top three stocks are Bharti Airtel, Power Grid Corp and HDFC Bank with holdings of 8.7, 6.7 and 5.1 per cent respectively.

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