- Wealth PMS (50L+)
Reliance Mutual Fund has opened a new fund offer for a fund called Reliance Long Term Equity Fund [Offer Document]
Type: Closed ended Equity fund (3 years) after which is converted to open ended.
Issue Opens: Nov 14, 2006
Issue Closes: Dec 11, 2006.
Entry Load: nil
Exit load: 2% to 4% (explained later)
This is a closed ended equity fund that will invest in small caps and midcaps, primarily and in derivatives as well. Debt is restricted to 20%.
1) No Entry load.
2) This being a closed end fund, can amortise initial issue expenses upto 6% and they intend to. This charge will be amortised over three years.
3) There’s a three year lock in, but if you do want to exit early, you can exit in the first five days after a calendar half-year (meaning Jan 1 to 5, or July 1 to 5) upto three years. An exit load or charge applies if you exit in the first 12 months (4%), 12 to 24 months (3%), 24-36 months (2%). Apart from that you will pay the amortised initial issue expense charge which can be another 2-4%!
4) As a zero load scheme, AMC can charge a further 1% as management fees (apart from the 1.25% it is allowed to charge)
5) The fund focusses on small cap (<250 cr market cap) and mid cap (<1500 cr. market cap) stocks.
My view: Don’t buy. Why?
a) The exit expenses can be upto 8% and this is quite high. If you want to exit this fund if it doesn’t perform, then you take a big loss.
b) There is a three year lock in but no ELSS tax savings. It’s not worth that expense.
c) Reliance has four other equity funds – Vision Fund, Growth Fund, Equity Opportunities fund, and Equity fund, apart from a Reliance Taxsaver fund. This fund is a small+midcap fund which is exactly like the Growth Fund, so there is nothing really special about this fund (other than the lock-in, which is a negative). If you like the AMC (it has done well), invest in Reliance Growth fund instead. For another fund that has the same investment objective (but no exit loads etc.) Sundaram Select Midcap is a good bet.
d) The risk is extremely high – small and midcaps are inherently risky, and more likely to collapse. The risk is not a problem, but combined with a very high exit load, it hurts you much more if this fund’s primary investments fail and then you can’t even leave without paying a huge sum.
It’s important to invest long term so the three year lock in makes sense. Even more so perhaps for small and mid-caps, some of which will take time to blossom. But if there are other funds giving you the same advantages (Reliance Growth, Sundaram Select Midcap) without the high exit loads, why should you choose this fund?
Overall, my suggestion is to wait and watch. Give this fund the three years it needs, let it run through its amortised expenses etc. and if it has done well, you can enter when it moves to an open ended nature.
(Comments from Personalfn . and Moneycontrol)