Should the Fund manager of a pure equity fund be allowed to buy Put options in the market?

Should an Equity Fund manager be holding cash in a rising market?

What if the PE of the market is too high, but the weighted average PE of the scheme is about 20% lower than the indices?

Well, these are questions with which the Trustees of a mutual fund SHOULD be grappling with. Trustees and even directors find it difficult to rein in a fund manager with a good track record.

Let us see what a customer should IDEALLY DO.

He should go to a financial planner set his goals, make his investment philosophy statement, and do his asset allocation.

Let us say the FP says 70% equity and 30% debt. All that person has to do is to put it in a fund with a 70:30 asset allocation and go to sleep. When he gets the first statement he should open the cover and file the statement. After doing this, he can go to sleep.

However in real life this does not happen. He will suddenly have a Rs. 20L FD maturing or a Rs. 5 L surplus from a bonus or some such thing. What should he do?

Ideally he should consult his Goal sheet and see which goal needs that extra money and whether he/she can put it in equity or debt. Or whether he should time the market or choose a fund manager who is good at timing the market. Let us take a fund manager like Naren Sankaran – he has got great results with Icici Prudential Discovery but obviously he could not do too well with the Infra fund. Also it takes 7-10 years for you to really judge a fund manager. As an outsider it is almost impossible to distinguish between skill and luck.

However, if you are confused about what to do with a surplus, you could use some thumb rules. If the surplus to invest is MORE THAN 10% of your liquid net worth, say it is Rs. 30L and your net worth is Rs. 2 crore treat it as a ‘lumpsum’. However for the same person Rs. 5L is not considered to be significant. So that can go into say your large cap equity fund in which you are doing a SIP already. However with this Rs. 40L surplus that you have you are not very sure that you want to put it into equity in one shot, what do you do?

Well there are the few options:

If you already have a pension plan like the FT Pension plan AND YOU ARE MORE THAN 50 YEARS OF AGE put say 50% in that plan and the balance in your regular portfolio.

If you are just 30 years of age and KNOW that equity is for the long term, and you have a 10-20-50 year view on your portfolio, frankly it will not matter which fund you put, as long as the fund does well.

Let us say you are not sure whether the market is high or low what do you do? Well there are 3 options now – the Icici Pru Dynamic fund – this is a fund manager’s delight. It allows the fund manager to decide how much to put in equities and how much in debt. Similarly FT also has a Dynamic PE fund, and now IDFC has a Dynamic PE fund.

Of course there are other options too like the balanced funds which do an asset allocation PERMANENTLY, however these 3 funds do the asset allocation based on the state of the market. They can look very good when the market has just come off a cliff, but can look pedestrian in a bull market. As long as you believe that the bull markets are more than bear markets and YOU are calm about it, you can be (and should be) in your strategic asset allocation. However the human mind is a monkey which keeps asking for new and varied products, and hence this product.

Do I invest in these funds? NO. Never. That is because I am a direct equity person and am comfortable with my 90% asset allocation to equity at all times. In a down market I am willing to buy call options and in a bear market willing to write the options!!

I also think that the asset allocation call is that of the investor not that of the fund manager. So I like a fully invested fund. ALWAYS. I will decide to take the cash calls, NOT MY FUND MANAGER. Writing options, buying puts or calls, keeping cash, investing in an IPO (Or not) has to be the prerogative of the client / FP – that is my feeling.

To me the state of the market is not a worry, the state of the company in which I am investing is a far more important indicator.

Right now I am waiting like a vulture to prey on a few banks testing their 52 week low. Tantalisingly close, but not there. Hey banks please oblige. I will buy ONLY as per my rules.

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  1. Subra Sir,

    I think the ICICI fund you are referring to which has a dynamic allocation is ICICI PRU BALANCED ADVANTAGE and not ICICI PRU DYNAMIC FUND.

    The later only takes some cash calls but stays with a equity allocation of at least 85 percent (remaining cash and no debt).

  2. The last three paras say it all. Quantum amc may have a different view. But they too may be as vulturous in falling markets suppose.

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