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Product Crack: Reliance Close Ended Equity Fund-Series A

This is a fund with a five-year lock-in which will be agnostic to market capitalization

Yet another fund is getting added to the basket of recently launched closed-end equity funds. This time from Reliance Capital Asset Management Co. (AMC) Ltd, which has a new fund offer (NFO), Reliance Close Ended Equity Fund-Series A. This is a fund with a five-year lock-in which will be agnostic to market capitalization and will seek to invest in good quality companies across the spectrum. You can apply only during the NFO which is on till 29 November.

What’s good?

The fund manager’s (Shailesh Raj Bhan) approach will be to pick stocks based on absolute valuation. He feels in the current market conditions there are many strong companies available at reasonable valuations in context to earnings, competitiveness and so on. Bottom-up stock picking is going to be the core strength of this portfolio. As the portfolio performs, if stock valuations get expensive, the fund manager will book profits and replace the stock with an appropriate one. The aim is to have around 25-30 stocks in the portfolio. Given the current market scenario, mid-caps have underperformed and the fund will have around 70-80% invested in mid-caps as it starts out. Deviations from the benchmark in terms of stock weightage can be large and that will help in generating excess returns if the fund manager’s stock picks work out. In his stock selection, the fund manager will try to pick companies where return on equity is increasing, earnings are growing and at the same time leverage is low and cash flows are sustainable.

What’s not?

Bottom-up stock picking is not a new or freshly innovative approach, Reliance AMC already has existing equity schemes with a similar mandate. Additionally, market volatility is a given and defining a specific period for entry and exit can be risky. In a closed-end fund you won’t be able to book profits in between the tenor. Sample this: in the first four years of the fund, markets are supportive and the fund manager’s strategy is playing out well, but since you can’t book profits if the tables turn in the last year and the gains are missing, you won’t benefit from the strategy much. Defining a five-year period does bring focus to the investor to remain invested and to the fund manager in terms of portfolio dynamics, but it is like timing the markets albeit for a longish period of five years. For long-term investors such timing may or may not give results. If things don’t work out in five years you could find yourself switching to another equity fund and waiting for the next one-two years for gains to come through.

Mint Money Take

Bhan also manages Reliance Equity Opportunities Fund which has a fairly good track record. Reliance AMC has a reasonable track record in stock picking, but there is no track record to say a closed-end strategy will work. Since this is a high-risk product, the rewards can also be high. Pick this fund if you are willing to take on the risk and are on board with the five-year period the fund manager is confident about.

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