BNP Paribas Mutual Fund believes that one of the ways in which the volatility could be reduced, is through a dynamic asset allocation strategy executed through a model-based approach (eg: reducing equity exposure at higher market valuations) while managing the risk profile of the overall portfolio.

[Read: Why Comparing Returns to Risk Is More Meaningful!]

Hence the fund house has launched BNP Paribas Dynamic Equity Fund (BNPPDEF), an open-ended hybrid- dynamic asset allocation fund.

Dynamic asset allocation or balanced advantage hybrid scheme tends to offer lower volatility by taking opportune bites into the equity market in times of volatility and at the same time offer possible reasonable upside participation.

[Read: Will Hybrid Funds Help You Handle Market Volatility In 2019?]

A dynamic asset allocation fund typically has a dominant equity exposure and can vary its equity exposure between 0%-100%. Under normal circumstances, BNPPDEF will hold an exposure between 65% to 100% to equities and equity-related instruments (using arbitrage opportunities) and would not be restricted to any one of the market capitalisation segments.

The fund will actively use asset allocation strategy to mitigate risk and may also allocate some portion (up to 35% of its total assets) to debt and money market instruments and units of REITs and InvITs (up to 10% of its total assets).

Table 1: NFO Details

(Source: Scheme Information Document)

How will the scheme allocate its assets?

Under normal circumstances, it is anticipated that the asset allocation of BNPPDEF will be as follows:

Table 2: BNPPDEF's Asset Allocation

​What will be the Investment Strategy?

The Scheme has the flexibility to allocate assets to both equity and debt instruments. However, the portfolio will primarily be equity oriented. This allocation will be steadily monitored and updated as and when the market movements demand it.

Equity and equity related investments: The Scheme will invest in companies across market capitalization and sectors. A combination of top-down and bottom-up approaches will be used to invest in equity and equity related instruments. The allocation to different market caps would vary from time to time depending on the overall market conditions, market opportunities and the fund manager's view.

The fund managers of the Scheme will take a call on the equity allocation based on the trailing monthly median Price-Earnings (PE) ratio of the Nifty 50 Index. The endeavour of the Scheme is to increase exposure of equities at lower PE level (when the market appears cheaper).

Conversely when the market becomes expensive (higher PE) the Scheme will reduce its allocation to equities and move assets into cash future arbitrage/equity derivatives, debt and/or money market instruments.

The equity allocation in the portfolio would be monitored on a monthly basis and rebalanced by the fund manager post the end of every month within a reasonable time frame. If need be, the fund manager may choose to rebalance earlier than the month end as well.

Equity Derivatives: The gross equity exposure will be maintained between 65% - 100% while the net equity exposure will be maintained between 25% - 100%. The difference between these exposures will be carried out using derivatives. The fixed income securities including money market instruments will be in the range of 0% to 35%. The Scheme will vary its investment in equity and equity related instruments depending upon the PE Band.

The AMC may also implement certain internal control procedures & exposure limits etc. for controlling risks which may be varied from time to time. The Scheme may utilise derivative instruments for hedging & portfolio balancing purposes.

Debt and money market instruments: The fixed income portfolio will consist of a pool of investment grade securities. The allocation to money market securities and other fixed income securities will be decided after considering the economic environment including interest rates and inflation, sector performance and general liquidity and other considerations in the economy and markets.

Who will manage the BNP Paribas Dynamic Equity Fund?

The equity portion of the BNP Paribas Dynamic Equity Fund will be managed by Mr Karthikraj Lakshmanan & Mr Abhijeet Dey, while Mr Mayank Prakash will manage the fixed income potion.

Mr Karthikraj Lakshmanan is the Sr Fund Manager (Equity) at the BNP Paribas Asset Management India Pvt Ltd. He has a bachelor's degree in commerce (B. Com) and completed his PGDBM from SPJIMR, Mumbai. Plus, he is a Chartered Accountant and has cleared CFA Level 3. Prior to being associated with BNP Paribas Asset Management India Private Limited since January 2011, he worked as a Senior Research Analyst at ICICI Prudential Asset Management Company Limited for a year and before that he was a Business Analyst at Goldman Sachs Services Pvt Ltd.

Currently, at the fund house, some of the funds which he manages to include BNP Paribas Large Cap Fund, BNP Paribas Mid Cap Fund, BNP Paribas Long Term Equity Fund, BNP Paribas Multi Cap Fund, BNP Paribas Focused 25 Equity Fund, BNP Paribas India Consumption Fund (Equity Portion), BNP Paribas Conservative Hybrid Fund (Equity Portion), BNP Paribas Substantial Hybrid Equity Fund and BNP Paribas Arbitrage Fund.

Mr Abhijeet Dey is the Senior Fund Manager of Equities at the fund house. He holds a BE (Mechanical) degree plus has an MMS (Finance) from Mumbai University. Before joining the BNP Paribas Asset Management India Private Ltd since August 2011, Mr Dey worked as an Equity Research Analyst at Kotak Mahindra Asset Management Co. Ltd, Pioneer Intermediaries Ltd, Frost & Sullivan Pvt Ltd. and Indiainfoline.com Ltd.

Currently at the fund house some of the schemes which he manages to include BNP Paribas Large Cap Fund, BNP Paribas Mid Cap Fund, BNP Paribas Long Term Equity Fund, BNP Paribas Multi Cap Fund, BNP Paribas Focused 25 Equity Fund, BNP Paribas India Consumption Fund (Equity Portion) and BNP Paribas Conservative Hybrid Fund (Equity Portion)

Mr Mayank Prakash is a Chartered Accountant (ACA) and has an MBA (Finance) to his credit. Before joining the BNP Paribas Asset Management India Pvt Ltd in August 2015 as a Fund manager he worked at Kotak Mahindra Asset Management Co. Ltd in investment operation to get promoted to be a Dealer -fixed income fund and later as a fund manager.

Currently, Mr Prakash manages BNP Paribas Substantial Hybrid Equity Fund, BNP Paribas Arbitrage Fund, BNP Paribas Corporate Bond Fund, BNP Paribas Flexi Debt Fund, BNP Paribas Low Duration Fund, BNP Paribas Short Term Fund, BNP Paribas Liquid Fund, BNP Paribas Medium Term Fund, BNP BNP Paribas India Consumption Fund (Debt Portion) and BNP Paribas Conservative Hybrid Fund (Debt Portion)at the fund house.

The outlook for BNP Paribas Dynamic Equity Fund:

With the aim to tap the potential of equity and debt for over a longer horizon the fund managers of the  BNP Paribas Dynamic Equity Fund will follow a process of dynamic equity allocation model.

Under this model, the portfolio construction will be such that it will increase the equity exposure during lower market valuations and higher market valuations it will shift the exposure to equity arbitrage and fixed income instruments. The arbitrage option will be used to maintain a net asset exposure towards equity related instruments but tapping arbitrage opportunities is a challenging task.

However, amidst the extreme turbulence constructing the portfolio would not be an easy task and may inflict very-high-risk.

[Read: Best SIPs To Invest in 2019]

As in an environment where the near-term sentiments in equity markets will be driven by macroeconomic conditions, global and domestic political developments, along with the outcome of upcoming Lok Sabha elections, the markets are expected to remain highly volatile. The elevated yields at present provide good opportunities but focusing on credit quality would also be imperative to reduce risk to capital.

Amidst the macroeconomic uncertainties looming, the fortune of the fund would closely be linked to how the fund manager plays the investment strategy in the endeavour to accomplish the stated investment objective of BNPPDEF.

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