Thursday, November 28, 2013

HERE'S WHY......YOU SHOULD AVOID RELIANCE CLOSE ENDED FUND



Reliance Mutual Fund has joined the mad rush for Close Ended funds and has launched Reliance Close Ended Equity Fund – Series A. 

The Fund has already open for subscription and will close on 29th of November. 

Since the fund is a close-ended, the Fund Managers will not have to worry about the inflow-outflow of investment. However, a lot would also depend on when this scheme is open for subscription and the maturity period from the date.
Fund Manager Mr.Shailesh Raj Bhan explained the nuances of the Fund to me and this is what I interpreted
Features of the Fund :
  1. The fund is not bound by any market capitalisation or theme or sector for choosing stocks.
  2. Portfolio of the Fund will be restricted to about 25 – 30 stocks.
  3. The Fund will NOT be a small Cap fund but will be a Flexible Fund
  4. The Fund will be run like a Alpha Fund. The Fund Manager will “refresh” the portfolio but not “churn” like a Diversified Fund.


Positive Points :
  1. Since the Fund is locked in, Fund Manager is saved by the hassle of investors redeeming his units and indirectly forcing the Fund Manager to avoid taking a very long term on any stock. Hence, here, the FM can ensure better returns by holding on to stocks for a longer period.
  2. Close ended funds have less churning and hence scope for lower expense ratios too ultimately resulting in better returns.
  3. The Fund is managed by Mr.Shailesh Raj Bhan who has been very consistent in the funds he is managing namely Reliance Equity Opportunities fund, Reliance Top 200 fund, Reliance Pharma Fund,etc.


Negative Points :
  1. Close ended funds can be invested only via Lumpsum and thus investors are deprived the benefit of Systematic Investment Plans. Lumpsum carry the risk of Timing the investments.
  2. Another disadvantage with Close ended funds is that even the Fund Manager will NOT get fresh inflows due to absence of SIPs and hence will be helpless to invest further in case of Quality stocks being available at cheap prices due to market correction or otherwise.
  3. Studies have proved that just because a Fund is close ended does not mean it will fare better than Open ended funds.

SRIKANTH SHANKAR MATRUBAI view : 

Close ended funds, according to me, go against the very basic premise of Mutual Fund investing.......TIMING THE MARKET.
Since you can invest only at the Fund Opening Period, you are forced to “TIME” the market., isn’t it???

Thankfully, even though the Fund is close ended, since it will be listed on Stock Markets, the problem of liquidity is solved to some extent.

The Fund has a Dividend payout and Growth option. Another option Dividend Transfer Option (to a Debt fund or another equity fund) would have been a good idea as normally investors tend to misuse the Dividend recd by treating it as “Free Money”.

The biggest negative against Close funded funds are that you do not get a opportunity either to average your cost of purchase in case of a downturn in performance and likewise neither you would get a chance to book profit if and when the fund performs above average.

RECOMMENDATION : 

If as the Fund House says, “Not investing now will be like a missing a great opportunity”, then why should I choose a Close Ended fund where I cannot scale up my investment nor can I average?

The Fund Manager, Mr.Shailesh Raj Bhan’s handling of other funds do inspire confidence, but the fact that the fund is CLOSE ENDED is the single biggest negative of the fund and negates most of the positives.
I would recommend AVOID.
If you are a Reliance Fan and do want to invest, then take the Dividend Payout option.
Best of luck,
Srikanth Shankar Matrubai


 


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