Should you invest in Sundaram’s new tax advantage fund?

Offer details:

NFO opens: 8 August 2016
NFO closes: 11 November 2016
Lock-in: 3 years
Type: 10 year closed-end

The launches of closed-end funds continue. Sundaram Asset Management Co. Ltd’s latest closed-end fund launch, Sundaram Long Term Micro Cap Tax Advantage Fund Series III (SMCAP), is about to close its new fund offer (NFO) launch period on 11 November. Should you invest in it?

What is it?

SMCAP is a tax-saving, equity-oriented scheme that offers tax-deduction benefits of up to Rs1.5 lakh under section 80C of the income-tax Act. It is a 10-year closed-end scheme, with a 3-year lock-in. In simple words, you can invest in this scheme only during its NFO period. After 3 years, you can withdraw your money anytime you want. After the scheme completes 10 years, it will wind up and return the money to the remaining investors.

It will invest in companies that the fund house calls micro-caps. Its definition of a micro-cap company is one whose market capitalisation is 301st or lower in terms of companies ranked as per their market capitalisation, listed on the NSE Ltd.

What works...

Typically, a closed-end fund works well for long-term wealth creation if your fund manager is able to identify good, small-sized companies and is able to buy their shares at attractive prices. The scheme’s co-fund manager Krishnakumar S., who is also the chief investment officer (equity) at Sundaram Asset Management Co. Ltd, told Mint that these are good times to pick up small-sized companies due to the favourable macro-environment. With government spending set to go up, and interest rates set to come down further, consumption will go up and this, he added, will benefit companies that profit from an uptick in an economic cycle. He said that sectors like auto, auto-ancillaries, textiles, engineering and cement will benefit over time.

...What doesn’t

Since 2013, the mutual fund industry has launched 26 closed-end funds, of which 11 have been in the small-cap space, as per Value Research. Flooding the market with many closed-end schemes could be a fund house’s strategy to gain market share, but it could also burden the management with several funds of tiny corpuses to deal with. Besides, there is a danger of losing focus in the pursuit of ensuring that these funds outperform their respective benchmark indices over a period of time.

Mint Money take

While Sundaram Select Midcap and Sundaram SMILE, two open-ended funds that track the mid- and small-sized companies, respectively, have consistently beaten their benchmark indices, we don’t agree with the fund house’s strategy to launch as many new schemes as it has over the last two years.

The truth is that the market regulator doesn’t give approval to new schemes if they are clones of existing ones, unless the new schemes are closed-end. But then, such schemes also incentivise distributors more than open-ended ones.

We suggest you avoid this NFO.