The document contains frequently asked questions and answers about the IDFC Dynamic Equity Fund. It discusses why Nifty P/E is used to determine equity allocation, that the fund's equity allocation can increase above 65% during market corrections, and that while the model aims to be disciplined it also seeks to respond to rapidly changing market dynamics through daily rebalancing.

1. Frequently Asked Questions April 2020
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FAQ - IDFC Dynamic Equity Fund
(Anopen endeddynamic asset allocationfund)
1. Why is Nifty P/E consideredtodecide allocation?
Funds in dynamic asset allocation/balanced advantage category cater to an audience which
want to have an equity exposure but with a reduced volatility. In line with this thought process,
the objective of our fund is to minimize volatility while maximizing return through active
rebalancing the equity exposure. To achieve the same, we follow a model based approach,
based on Nifty trailing Price/Earnings (P/E) multiple and the model enables the fund to
increaseactive equity exposure when the P/E is low and decreaseactiveequity exposure when
the P/E is high.
We have used Nifty as an index as it represents all sectors of the economy and any
inclusion/exclusion in Nifty index is reflective of the changes in the underlying nature of
economy.
Further, unlike Forward PE which is predictive in nature and based on consensus estimate
(which keeps varying), we believe that trailing PE fits in our attempt to provide a transparent
and disciplined framework for equity allocation.
On P/E versus P/B:
P/E is a more dynamic ratio as compared to Price/Book (P/B) as all companies report their
earnings every quarter while balance sheet disclosures happen once in 6 months. Thus,
denominator in P/E ratio gets updated every quarter while that in P/B ratio gets changed once
in 6 months only.
As a final thought, we continue to believe that rather than focusing on the model alone, one
needs to monitor the transparency of the model and the disciplineand rigour used in following
the model when rebalancing is done.

2. Frequently Asked Questions April 2020
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2. The fund appears tohave maintaineditsallocationlargelyaround 50-60%.Will
it ever increase its equity allocationbeyond65%?
Ever since the fund changed its strategy in June 2017, the average active equity allocation till
Jan 2020 was around 50%, but in the recent market correction, the fund increased its active
equity exposure to 65% in March 2020 and above 75% for April 2020. This has effectively
answered two most asked queries:
a) The fund will increase its active equity exposure when valuations are low. In fact, the fund
can go to 100% active equity exposure if Nifty P/E falls below 9. As of March 2020, Nifty
P/E was 15.9.
b) Even using a P/E model, the active equity exposure can go above 65%, as when market
corrects, even P/E sees a sharp correction
3. Some advisors believe dynamic equity modelsneedtobe more “dynamic”and
respond to rapidly changing market dynamics, else they don’t really capture
sharpmovements inamarket where cycles are getting quiteshort. Howwould
you react to this view?
Predicting or timing the market seldom works. What is essentially required is a disciplined
approach towards investing. To this extent IDFC Dynamic Equity Fund is based on a
predetermined model and offers a disciplined approach towards equity allocation. While the
month end P/E defines the band in which the fund can operate, the fund manager adjusts
equity allocation within this band on an active/daily basis. Therefore, if the valuation shifts to
completely opposite end of the band during the month (say from PE of 26 to PE of 22), the
fund manager would have typically adjusted his equity allocation (from a 40% allocation at PE
of 26 to 55% allocation when PE is 22). This daily rebalancing is also done by taking positions
in Nifty futures. So, if the fund needs to increase active equity exposure by 2%, it can either
do it through buying stocks or buying Nifty futures. And conversely, if the fund needs to
decrease active equity exposure by 2%, it can either do so by selling existing stocks or shorting
Nifty futures. Using Nifty futures reduces transaction costs for the fund while helps in
realigning active equity weight as close to the weight indicated by the model.

3. Frequently Asked Questions April 2020
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4. Are derivativepositions takentoearnextrayieldor only tohedge or rebalance
the portfolio?
Derivative positions in terms of Nifty future exposures are taken to rebalance the portfolio
within the bands. Further, the hedged derivative positions or equity arbitrage is done to
maintain 65% allocation towards equities. This helps the fund maintain its equity taxation.
5. Is rebalancing done only throughderivatives?
Not necessarily. It can be done both through active stock buying/selling or long/short Nifty
futures.
6. What is the equity strategy of the fund?
The fund follows a multi cap approach and does not have a range for large, mid or small cap
allocation. The fund manager actively manages the market cap of his equity allocation basis
market valuation and economic conditions. For example, in the current market condition, of
an unprecedented crisis, the fund manager may deploy more towards large cap owing to its
relatively stable characteristics.
7. In which scenario can a P/E based allocation decision lead to
underperformance?
The P/E based model will suggest increasing its equity allocation in a bearish market. With
every increase in equity allocation if the market continues to fall, the fund may witness
underperformance versus peers that hold lower equity allocation.
Similarly, in a rising market, the equity allocation of the fund may reduce and it may
underperform if the market continues to keep rising.
However, the philosophy of the fund is to ‘Buy Low and SellHigh’ which we believe will provide
investors a smoother participation in equity markets over a longer time horizon.
8. Justificationfor the current benchmark

4. Frequently Asked Questions April 2020
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The current benchmark of the fund is 50% S&P BSE 200 TRI + 50% NIFTY AAA Short Duration
Bond Index. The allocation of 50:50 towards equity and debt is based on the typical average
historical allocation of the fund.
9. Details onDebt investment strategy
The debt portion of the fund is actively managed. The portfolio emphasizes on maintaining
high credit quality and currently has 100% in AAA instruments. Further the portfolio will be
oriented towards short-to-medium duration strategies in order to constrain the duration risk.
10. Comparisonwith peers onallocationdecisions (P/E, P/B, Volatility etc.)
While we will refrain from commenting on models followed by others, we would like to
highlight that peers in the Dynamic Allocation category are very diverse. Some of them follow
momentum strategy while some follow Valuation strategies and yet some others follow a mix
of strategies. While most of the peers have in house models, our model is transparent, simple
and published across our documents. This also helps us to be consistent and disciplined in our
approach towards dynamic allocation.
11. Why does the fund change its band only once a month?
The fund’s equity allocation is decided at the beginning of the month basis previous month
end’s Nifty PE value. Since it is a band that gets fixed at the beginning of the month and the
fund actively rebalances its allocation anytime within the band. This methodology helps us to
avoid whip saws in the markets and so we do not see a requirement of changing the band
more frequently. Also, our bands are fairly wide and we don’t see P/E moving across bands
within a single month on a regular basis.
12. Why are the benchmarks across peers different?
Different funds have different average activeequity allocation– some run higher and some run
lower; to that extent the benchmarks will also be different.
13. Is the fund suitable for systematic withdrawal?

5. Frequently Asked Questions April 2020
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The fund allows up to 10% of its units to be redeemed within 1 year without any exit load –
1% Exit load will be levied on redemption above 10% of the units within 1 year. After 1 year,
no exit load will be levied on investments.
All data as on 21st April 2020
Investors are requested to refer to Scheme Information Document for more information on Scheme. The asset
allocation and investment strategy shall be as per provisions of Scheme Information Document. The Trustee
reserves the right to modify the exit load structure from time to time, on prospective basis. Past performance may
or may not be sustained in future.
Riskometer
IDFC Dynamic Equity Fund
(Anopen endeddynamic asset allocationfund)
Disclaimer: MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME
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advisor before making any investment decision in lightof their risk appetite, investment goals and horizon. The decision
of the Investment Manager may not always beprofitable;as such decisions arebased on the prevailingmarketconditions
and the understandingof the Investment Manager. Actual market movements may vary from the anticipated trends. This
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