Over the last few years and especially in 2017 and 2018 many of the Fund houses have come up with a slew of close ended NFO’s. These come with a variety of themes and associated terminology. For example ICICI calls them Value Fund series, Sundaram calls them Micro cap series and Axis calls them Equity advantage series. In this post let us look at why these are in vogue now, what are the pros and cons and finally whether it is a good idea to invest in them.
The first issue is relatively simple to answer : new products get developed based on the likelihood of their success. With a lot of retail and institutional buyers pumping in money, there is always a demand for newer types of funds to invest in. For fund houses, it is an opportunity to have a specific charter which may not be possible to fulfil through their regular funds. For example, one of the ICICI value series funds only wanted to invest in Pharma and IT sectors as these were beaten down significantly over the last six months or so. Now this could be done in one of their existing funds too but for a fund manager to churn the portfolio by selling stocks that are doing well is not always an easy decision to take. Using fresh money in taking such calls is relatively simple. The trend started by end 2014 or so with ICICI and has now percolated to several others.
What are the pros and cons of such funds? Well, for one the mandates here have a lot more clarity compared to a vanilla large cap or mid cap fund. The fact that it is close ended, normally for 3 years, means that the fund manager has time at his disposal to take the calls he wants to take. On the flip side you will not have access to your money for 3 years and this is a problem unless you can definitely do without it for this time. A greater problem may be your inability to shift in case you are not happy with the performance. From my viewpoint, I do not see both these issues as a serious one. Firstly, you should be investing in equity for a much longer term than 3 years. Secondly, the Fund manager is way more qualified to deal with short term performance issues.
Let me now give some details of an investment that I made in one such fund. While the experience may not be repeated for all funds, it does offer certain insights:-
- I purchased ICICI Prudential Value Fund series 2 on 6/12/2013. Invested amount was 2 lacs in the Dividend option.
- The idea was to get some regular income as I planned to go for my consultancy practice sometime in 2014.
- Though it was a 3 year fund, it has now been rolled over and will mature on 31/12/2018.
- So far total dividends have amounted to 2 lacs
- Current value of the fund is nearly 2.1 lacs
I think it can be said quite safely that this worked out quite well. In fact, I have invested in several follow up NFO from ICICI. Apart from ICICI I have also tried out Axis, Birla Sunlife, Sundaram and UTI for close ended funds. From a personal perspective it works well for me as I got tax free income and also growth from it. With the change in taxation, the returns will be lower but it is still a better bet than most of the other options.
You should be investing in these funds under the following situations:-
- You have some income requirement every year. Instead of doing FD you can go for close ended funds with dividend option. Note that the dividend is not guaranteed.
- You have a goal after 3-4 years. This is ideal for such situations. However, in such a case choose the Growth option.
- You have come into some money and do not want to decide on allocation for 2-3 years as you may need the money then. Go for the growth option here too.
- Make sure you understand the mandate and therefore the associated risk profile. A micro cap series from Sundaram will obviously be more risky as compared to the Value fund series of ICICI. However, the rewards will vary in a similar trend too.
If you are interested in these funds after reading this post, do consider the following NFO’s that are ongoing now :-
- ICICI Pru Pharma, Healthcare and Diagnostics fund
- ICICI Pru Bharat Consumption fund – Series 3
- Tata Value Fund – Series 1
All of these funds have interesting themes and are likely to do quite well over the 3 year period. Personally I have put 1 lac in each of the ICICI funds.
People having surplus money and waiting to invest in some suitable avenue should take hold of this opportunity.