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Should you extend tenure of closed-end funds to gain more?

Posted on September 30 2020




ICICI Prudential AMC's closed end equity fund ICICI Prudential Value Fund-Series 1, is due to the maturity in November this year, but the fund house has proposed to roll over the maturity date by 2 years till 31 December 2018. It has asked the investors to send an approval slip for the roll-over offer in the scheme to indicate their consent before the maturity date. Alternatively, the investor can regain his money at the applicable NAV on the existing maturity date. 


Senior management at the fund house indicate that they are considering similar extension to the next fund in the series as well. Sankaran Naren, CIO, ICICI Prudential AMC said that they continue to have a constructive view on the market and believe there is enough scope for beating further gains. The fund house maintains that the rolling over will allow the investors to continue to benefit from improving the macro-economic data, visible earnings growth for corporate in the next 2-3 years and an improving the micro-economic scenario. Should you take the fund house up on this offer?


Experts contend that investors may consider choosing for the extension based on their asset allocation and the money requirements. Investors may continue with the investment for maintaining their desired equity allocation and gaining from the emerging market opportunities. If the investment was for a specified time period for a particular goal, investors may either regain on the maturity or continue with the fund while regaining from any other open ended equity funds that have not performed so well. 


ICICI Prudential Value Fund-Series 1, which accumulated Rs 396 crore during the NFO in November 2013, has delivered top notch returns. It has paid out a combined dividend of Rs 5.75 per unit across 7 intervals. Apart from this, in its NAV, it is currently sitting on an annualised gain of 26%. Like most other closed-end funds launched around that time, this fund sought to exploit the prevailing valuation gap in the companies that otherwise boasted the sound fundamentals. It adopted the value investment approach to pick the stocks mostly from the mid-cap basket which, at the time, was trading at a deep discount to the large-cap portion. 


Also the closed end structure of these funds have allowed them to have a more focused approach and ride out conviction bets to their potential without having to worry about periodic outflow or inflow of money during the tenure. In an open-ended fund structure, the investors often fail to realise the full potential of the scheme by regaining too early. The closed-end structure explores to eliminate the behavioural element by having a lock-in for the scheme tenure. This approach has worked quite well for most funds launched during this time. 


Over the past few months, ICICI Prudential AMC's fund has cut back on its exposure to the midcap portion in the response to the huge rally in this basket. It has steadily built up large-cap exposure to protect the returns that generated so far, and is likely to maintain this large-cap preference given the widening valuation gap between the two universes of stocks. 


Tax Assist is a professional income tax consultancy in India for both corporate houses and individual tax payers; the latter comprising Salaried Individuals, Seafarers, Professionals and Non Resident Indians.


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