New Fund on the Block. Sticks to bluechips and gilts

The latest in a flurry of new fund launches is one from the SBI stable. The open-ended SBI Dynamic Asset Allocation fund will tactically shift allocations to equity and debt depending on certain market indicators. The fund is benchmarked to a 50-50 blend of the CRISIL one-year CD index and the Sensex.

The SBI Dynamic Asset Allocation fund (SBI Dynamic) will switch between asset classes based on momentum indicators defined by moving averages. That is, the fund will consider the short and long-term moving averages of the Sensex and the 10-year Government security (G-Sec) yield and measure it against current prices. If the current market price of the index is greater than the short-term moving average, which in turn is above the long-term average, the higher the allocation will be to that asset class.

This, however, can result in buying more when markets are trending higher which goes against the logic of selling at highs and buying at lows. However, the fund will also look at the strength of the momentum and potential reversal. But this aspect relies more on the fund manager’s gauge of market conditions than specific indicators.

Such checking of indicators will be done on a daily basis, though the portfolio certainly will not change that often.

But the fund is still liable to have a higher churn than other asset allocation funds, especially during volatile markets. Frequent churns in stocks and debt instruments can result in higher expense ratios. The average expense ratio of balanced funds is around 2.5 per cent.

As to where the fund will invest, it keeps it simple. Equity exposure will be limited to stocks in the Sensex basket and a dose of Nifty index futures, which can work as a hedge. The debt portion will be invested in 10-year G-Secs, though the fund can still play around with maturity profiles. The fund can fall back on cash if both equity and debt look overheated.

The SBI Dynamic fund, as it uses specific technical indicators, may be more objective in its allocation. Sticking to blue-chips and gilts also lowers risk. But on the flip side, returns will be limited in such a portfolio. Asset allocation funds are meant more for conservative investors who cannot decide allocations on their own. However, the existing funds in the category have neither been around for long nor sported good return records.

Tax treatment for SBI Dynamic will depend on when you redeem units.

If, in the preceding 12 months, the average equity allocation is over 65 per cent, it is taken as an equity fund and treated as such. If not, taxes apply depending on your holding period.

Both the debt and equity portion of the fund will be managed by Dinesh Balachandran, who manages the debt and gold portfolio of SBI’s EDGE fund. The NFO will close on March 24 and reopen for subscription on April 10.