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Home > Business > Special

Reliance Equity Fund

February 15, 2006

  • Type
  • Open-ended equity (diversified)
  • Benchmark
  • BSE Sensex
  • Min. Investment
  • Rs 5,000
  • FaceValue
  • Rs 10
  • Entry Load
  • NIL*
  • Exit Load
  • 2.00%**
  • Issue Opens
  • February 7, 2006
  • Issue Closes
  • March 7, 2006
    *During NFO period, 2.25% on ongoing basis. **On exit within 6 months from date of allotment, 1.00% on exit within 12 months from date of allotment.

    Investment Objective*

    The primary investment objective of the scheme is to seek to generate capital appreciation and provide long-term growth opportunities by investing in a portfolio constituted of equity & equity related securities of top 100 companies by market capitalization and of companies which are available in the derivatives segment from time to time and the secondary objective is to generate consistent returns by investing in debt and money market securities. *Source: Offer document

    Is this fund for you?

    Reliance Equity Fund (REF) is a rather innovative offering from Reliance Mutual Fund. REF has got the mandate to short sell in the derivatives segment, something of a first in the mutual fund industry.

    REF works with the objective of maximising returns for the investor across stock market levels. As funds are managed today, it becomes relatively simpler to maximise growth for the investor at lower stock market levels, when well-managed companies are available at attractive prices. However, rising stock markets prove to be something of a challenge for the fund manager when attractive investment opportunities dry up and there are fewer stocks at reasonable valuations.

    This is where REF's flexible investment mandate comes in. To begin with, REF can go short in the derivatives market. This flexibility will prove particularly useful during a bearish phase or during a stock market rally like the one that was witnessed in the early part of year 2000, for instance. It can go short in the derivatives segment upto Rs 15 bn (Rs 150 crores) or 10% of its portfolio whichever is lower.

    While 'shorting' is a speculative activity which entails taking on a significantly high risk (the losses could be higher in case of futures) it can nevertheless turn in handsome returns in times where a fall in the market seems imminent. However, one needs to note that the Indian derivative markets are still very shallow in terms of the instruments available (futures for example do not have a tenure of more than 6 months). The fund manager therefore has little to choose from; he has to be very accurate in his calls as he stands to incur losses if the markets do not go his way in such a short time period (past experience suggests that the markets can remain mispriced for longer periods). The other alternative for the fund manager is to "roll - over" his short position to the next period, in which case there are transaction costs involved.

    REF has the flexibility to hedge its portfolio in line with the stock market level. At a higher stock market level, the fund can hedge a higher proportion of its portfolio, with the option of hedging upto 100% of its equity assets.

    While some equity funds do hedge their holdings, REF is probably the first fund to quantify the amount of hedging it will do as per a defined criterion. This feature will ensure that as the market valuations rise, the fund will gradually 'lock' in the gains by increasing the hedging component. While this seems to be a good strategy, investors need to take note of the fact that to the extent the portfolio is hedged, further upside is limited (a 100% hedged portfolio will not deliver any return - positive or negative).

    In our view, while REF does have an interesting investment proposition, there is considerable risk involved if the fund manager goes wrong on some of his 'short' calls. Moreover, indications are, its only a matter of time before other equity funds (both NFOs and existing funds) are extended the mandate to go short in the derivatives segment. In the event of such a move, REF will lose its value proposition in favour of diversified equity funds with well-established track records and the flexibility to short-sell.

    Portfolio Strategy

    REF is mandated to invest in the top 100 companies by market capitalisation or stocks traded in the futures and the options segment. At any time, it will invest a minimum of 75% of net assets in equities. It has a flexible investment strategy that can respond to changes in the stock market valuations by short-selling.

    InstrumentsAllocation Range
    Equity and equity-related securities75%-100%
    Debt and money market (including securitised debt)0%-20%

    If the stock market valuations are on the higher side, the fund manager has the option to hedge in the futures/options segment to lock in gains for the investor. Since he has the mandate, it is likely that he may also choose to go short in the future/options segments to maximise gains. Likewise, at lower stock market valuations, the fund manager will increase exposure to stocks (cash market) and reduce the level of hedging. Since the risk is lower in the options segment, the indication we have got is that the fund will participate more actively in the options segment.

    The fund manager's decision to invest in stocks (go long) or participate aggressively in the futures/options segment will be linked to the P/E of S&P CNX Nifty, its benchmark index. (The P/E ratio of an index is the weighted average P/E ratios of the constituent stocks of that index).

    Weighted average P/E ratio
    of S&P CNX Nifty
    Portfolio hedge as a %
    of equity portfolio
    Upto 120 - 10%
    12 - 1610 - 30%
    16 - 2030 - 50%
    20 - 2450 - 70%
    24 - 2870 - 90%
    Above 2890 - 100%

    As indicated in the table, if the P/E multiple of the S&P CNX Nifty is 10, then REF will hedge a maximum of 10% of its portfolio. Likewise, at higher market levels (P/E multiple over 28), the fund has the option to hedge upto 100% of its portfolio.

    Fund Manager Profile

    Sunil Singhania is Fund Manager - Equity at Reliance Mutual Fund. He is a CA and CFA from AIMR, USA. Before joining Reliance Mutual Fund, he was associated with Motisons Securities Pvt. Ltd, and Advani Share Brokers Pvt. Ltd. He also manages Reliance Growth and Reliance Equity Opportunities among other funds.


    More Specials

    Given that a large portion of REF's net assets will be invested in large cap stocks, one can expect a degree of stability in its performance. Large caps have established track records with predictable earnings. This lends a degree of relative stability to their performance vis--vis small/mid cap stocks.

    In our view, REF's investment mandate has the flexibility to maximise gains for the investor across stock market levels (by hedging the portfolio). However, as explained, 'shorting' in the derivatives market is an activity that carries significant risk. Investors therefore must recognise this well before investing in the fund.

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    Share your comments

     What do you think about the story?

    Read what others have to say:

    Number of User Comments: 6

    Sub: reliance equity fund

    What is the fate of the investment done by us in the captioned fund in march 2006.

    Posted by Jagbir Singh

    Sub: what is the way to exit or enter in SIP

    what is the way to exit or enter in SIP please tell me in detail

    Posted by Ravi Ranaut

    Sub: Reliance Equity Fund

    Hi, My a/c No is 40127320852. I had deposited Rs 50,000/ on 12 April 06for REF. I have, till date, not received any communication from ...

    Posted by Roma Mattu

    Sub: Reliance Equity Fund

    Hi, This is a good overview about the Fund, but i think it was provided little bit late. It will be more helpful to readers ...

    Posted by Kapil Jindal

    Sub: reg - portfolio

    can u tell in which sectors ur going to invest the money and what is the percentage

    Posted by srikanth



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