The Hindu Business Line : Reliance Equity: Hold

Unitholders can retain their holdings in Reliance Equity Fund based on its two-year track record. Reliance Equity is a diversified open-ended equity scheme but in the true sense, is quite different from pure diversified funds.

To protect its portfolio value from downside, the fund hedges in the derivative segment based on the price earning ratio (P/E) of the index which, in this case, is the S&P CNX Nifty.

As per the fund’s mandate, if the P/E multiple of the index is between 16 and 20 the fund will hedge the portfolio to the extent of 30-50 per cent. Since the fund’s launch, the average P/E multiple of the Nifty has been 14 and 27, averaging about 19. The fund’s mandate may result in the fund containing declines in the NAV better than its peers who do not use any hedging strategy.

However, the fund could trail some of its fully invested peers in a rising market. In the period since inception, the fund has trailed its benchmark, probably due to its exposure to derivatives and higher cash positions.

Investors who would like to contain investment downside in volatile markets can continue to hold the fund. Those with a long investment horizon and a higher risk appetite may consider a switch into DSPML Top 100, which may have the potential to match the markets in the event of a secular rally.

From a record collection of Rs 5,800 crore at the time of its New Fund Offer, Reliance Equity’s assets under management witnessed steady outflows and, as per the latest portfolio, the assets under management are Rs 2,330 crore.

Performance: The fund generated a negative 2 per cent return over a one-year period and has trailed the benchmark S&P CNX Nifty (positive 1.4 per cent) by about 3 percentage points.

This is owed partly to the hedging strategy and partly to fairly heavy cash positions. Interestingly, the fund did decline sharply in the initial phase of the correction in January, it lost close to 35 per cent of its NAV despite holding 25 per cent of the assets in cash. But it has stepped up the proportion of hedging subsequently and fared much better in recent months.

Portfolio overview: Given the fairly large asset base, this fund has a very compact portfolio, consisting of 18 stocks. A focus on large cap stocks from the Nifty basket has helped the fund take sizeable exposure without significant impact costs. To protect from downside, the fund has actively used cash. In June, it held cash as high as 32 per cent of the assets. With the markets in a highly volatile phase, calling a reversal can be difficult. If a fund holds high cash positions consistently, there is a risk of investors missing out on any sharp rally.

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