February 12, 2012 12:21 am
I have heard of many dynamic funds that changes their investment style and portfolio depending upon the market conditions. how effective these funds are? Is it worth investing in such funds?
Dynamic funds are sound in theory but hits the roadblock when it comes to implementation.
What dynamic funds do is timing the market – Exit when few parameters, say, like P/E, go up and load up when markets fall. Historical data has clearly shown that timing the market is impossible. So if someone sells a stock tday saying the market has gone up ~ 20-30% in 2 months they may miss the Sensex ride to 19000 or perhaps benefit if sensex falls to 16000 levels.
In the longer run it is more likely that getting in and out of the market will lead to overall under-performance versus the Index and in the odd case such funds beat the index the beat will be marginal.
Dear Rajan, from the point of giving a cushion to your portfolio in the changed market condition, a small part of your portfolio may be invest in such dynamic funds But please do note the final return of these dynamic funds, may remain average & not extra ordinary. Although it’s equally true that all of us as an investor wants only super performers for us.
I think they are not a bad choice to make. But think about a factor that end of the day they are being headed by fund managers who are Individuals. I have worked in several Investment Banks and have seen that fund managers, though assisted by computer models, take a call on what direction they want the funds to be invested. And this direction can go wrong.
Hence, to summarise, you can have it as one of the funds in your portfolio without being over weighted on it.
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