The Hindu Business Line : Reliance Equity: Hold

Reliance Equity created history this March, mobilising more than Rs 5,500 crore from its new fund offer. Launched near the market peak, the fund attracted tremendous interest, as it promised to minimise risk of an adverse movement in stock prices by hedging a part of its portfolio through participation in the derivatives market.

Over the past six volatile months, it has delivered a return of about 4 per cent, which places it in the high ranks of the performance charts. However, Reliance Equity's skill in hedging its portfolio has not been fully demonstrated in this period, as the fund held significant cash positions in the first three months from launch.

Cash accounted for 40 per cent of the portfolio as on April 30, which protected it from the major downslide in May. Between March and now, the fund beat the Nifty only in May. In the recent recovery, its gains have been muted.

Unitholders can stay with the fund. Investors with a fancy for the fund's investment strategy can consider exposure after evaluating it over a longer period say a year.

Features: Reliance Equity invests in the top 100 stocks by market capitalisation and in stocks that have a presence in the derivatives segment. At least 70 per cent of the stocks are invested in equity while the balance can be invested in the debt and call money market. In addition, the fund will hedge a part of its portfolio depending upon the market level. For instance, if the fund holds a stock worth Rs 1,000 and fears that it will fall, the manager sells the futures of the stock. If the stock does fall, the losses are minimised, as gains accrue from his position in the futures market.

The extent to which it will hedge its portfolio is linked to the market's price-earnings ratio. For instance, if the Nifty P/E is between 16 and 20, it will hedge between 30 and 50 per cent of its equity portfolio.

Suitability: While hedging minimises risk, it caps the upside potential. This is because the contrarian positions in the spot and derivatives markets offset each other, minimising returns. The concept is, therefore, suitable for investors looking for more stable returns rather than return maximisation.

Also, the risk is not completely eliminated as only a portion of its portfolio is hedged. In turn, the performance of the fund will hinge on the manager's accurate perception of risk. Moreover, the fund can also take positions in the derivatives market on stocks that it does not hold. This heightens risks.

Reliance Equity may encounter problems with its large asset base, given the limited basket of 100 large-cap stocks. Till now, it has maintained at least 30 per cent of its assets, or more than Rs 1,500 crore, in cash. Its position in the derivatives market has also not been more than 10 per cent of the portfolio. In this context, its ability to fully exploit this strategy is uncertain.

Portfolio overview: As of August end, the fund was 75 per cent invested in equity. The fund hedged about 10 per cent of its equity by going short in the futures market.

The equity portfolio consists mainly of bluechip companies, with the top ten holdings accounting for 36 per cent of the assets. Software, banking and oil were the top three sectoral holdings. The fund is managed by Mr Sunil Singhania.

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