Understanding yield gap and how it can be used in asset allocation

There are a few asset allocation based funds in the market. Most of them use parameters like P/E, P/B, dividend yield to decide the quantum of equity allocation in the fund and the balance is invested in fixed income. DSP BlackRock Dynamic Asset Allocation fund is different in the formula it uses for asset allocation; they use the yield gap model. This model uses the ratio of the G-Sec yield & earning yield of NIFTY to decide which asset class is relatively cheaper and which one is relatively overpriced. Based on this an asset allocation decision is made.

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