Review on Franklin Templeton India Dynamic PE Ratio Fund of Funds

There are hundreds of mutual fund schemes available in India. Out of which there are several excellent schemes but we should not go by the excellence of a scheme. Right approach would to select a scheme which suits an investor and his risk profile. As you have mentioned in your Question let’s review the fund you are interested in investing, Franklin Templeton India Dynamic PE Ratio Fund of Funds. It may sound out of box at the initial stage but we have good number of reasons to suggest this scheme. Have a look at the following analysis:
Fund’s unique Investment Strategy:

If the average P/E ratio of NIFTY falls below	Equity component	Debt Component
Up to 12	90 – 100	0 – 10
12-16	70-90	10-30
16-20	50-70	30-50
20-24	30-50	50-70
24-28	10-30	70-90
Above 28	0-10	90-100

Date of Commencement: October 31, 2003.

Fund Manager: Sukumar Rajah

Latest Fund Size (Sep. 2010): 868.34 crores

Expense Ratio: 0.75%

By looking at the basic information available on www.franklintempletonindia.com lets start analyzing the fund.

As this fund is FOF we are first required to check the scheme it has focused in. Here the fund focuses on only two funds namely

1. Franklin India Bluechip Fund (Commencement : December 1,1993)
2. Templeton India Income Fund (Commencement : March 5,1997)

Performance of Franklin India Bluechip Fund (Equity)

Performance of Templeton India Income Fund (Debt and Liquid)

Performance of Dynamic PE Ratio Fund of Funds

Quartile Performance of Dynamic PE Ratio Fund of Funds (Source: www.valueresearchonline.com)

Why invest in this Fund:

Mutual fund follow a simple concept i.e. older is better. Here P/E fund is 7 years old moreover the funds in which it has invested are also more than 10 years old. We can observe the consistent performance from both the funds. Return of P/E fund is close to the performance of Bluechip fund even though the risk assumed by the fund is lesser than the normal equity fund. From quartile returns it can be concluded that concept of the fund works well and same is proved by the returns during the year 2008 when market badly fell from 21000 points. Hence fund has the ability to protect the investors’ interest even in the bad times. The approach of being conservative when market becomes risky works well for the fund. Though the fund is not in limelight it’s a better choice for the investors who are a bit conservative but still wants to benefit from the growth of market. And at Money School we always believe that this fund will be better than the hybrid funds and investor will also show some interest in FOF.

Why not to go for this Fund:

The only disadvantage with this fund is expenses. Being FOF investor will have to be ready to bear a bit more of expenses because of the twin layers. Otherwise you can always go with scheme.

Happy investing! If you want our Experts to Review the Funds of your choice, feel free to mail us. We welcome your response, if what we do, what we write makes a difference in your financial life.

Data Extracted form:

www.franklintempletonindia.com

www.valueresearchonline.com

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Investment in Gilt Funds may not be risk free!!!

Gilt is the part of debt segment of capital market. A normal debt instruments is exposed to

1. Interest rate risk
2. Reinvestment risk
3. Default risk
4. Liquidity risk etc.

As we are discussing about gilt, there is no default risk and reinvestment is dependant on the skills of the fund manager as well as on the prevailing yield of the Gsecs. Gilts are highly liquid in nature and Gilt funds, being the mutual fund are liquid.

The biggest risk associated with gilt investment is interest rate risk. Lets don’t understand the bonds in detail but understanding the basics of the bonds are quite essential. The basic principal of the bonds say that ‘Price of the bond and yield are inversely related’. When, yield goes up the price of bonds and gilts decline and vice versa. We also know that interest rates have always been volatile and they will be hence, the price of the bonds and gilts will also be volatile.

Investors in gilts don’t face default risk but he bears price risk (change in the price of the fund). Let’s understand with 3 well performing gilt funds with the help of www.valueresearchonline.com

 ICICI Pru Gilt Investment Fund

 

Quartile Returns

 

DSPBR Government Securities

 

Quartile Returns:

 

Templeton IGSF LT

 

Quartile Returns:

 

By looking at the performance of above gilt funds it is quite clear that if you had bought and held the gilt fund for 5 years the CAGR is 8% to 9%. If we consider 1 year returns is 2.25% to 5.6% which is lower than the prevailing FD rate. So one thing is clear that gilt funds are not the substitute of FD and it requires patience from an investor because of the price risk involved. The more interesting analysis will be of quartile returns. If you remember the interest rates in 2008, it was increasing but by the end of the year it started declining. You can clearly see the impact of the same on the returns of the gilt funds. The last quarter of the year 2008 fetched returns 18% to 32%. Doesn’t it sound surprising! Gilt has the potential to boost returns of the portfolio but buy and hold doesn’t work much for an investor and FDs are better choice rather.

Lets understand why did it happen? As interest rate decline, price of the securities increase and vice versa. In the last quarter of the year 2008 interest rate declined shapely hence gilt fund made most of the return from that quarter. If we consider normal return from that quarter the returns from the gilt fund would have been lower than the FDs. That is what the risk is with gilt investments. See the returns of 1^st quarter of the year 2009 the return is 0.13% to -10.8%. You can also lose money when gilts are timed wrong.

So better strategy will be to invest gradually in gilt when interest rate start increasing and quit gradually as interest rate decline. You will make money if this strategy is followed with common sense. Gilts are normally not for buy and hold, they are more for speculation and same with the gilt funds.

When markets are down, normally the rate of interest is higher at that time. If invested at that time in gilts you have the potential to generate positive returns to your portfolio. One more thing to consider is duration of the portfolio. Lager duration means higher volatility and vice versa. Hence when you expect the interest rates to decline ideal strategy will be to invest in the fund which has larger duration. And once rates are down you should be out of the fund because as interest rate increases the price declines and gilt will start producing negative returns, that’s what has happened in the 1^st quarter of 2009.

At present interest rates are going up so we at money school believe that now opportunity may arise to invest in gilts, once the rate hike is confirmed. So make informed decision. Gilts may not suite you if you are conservative investor better choice is FD. But if you have moderate risk appetite and holding capacity gilts will definitely work for you if timed properly and we think that’s not too tough as with equity.

Happy investing..