Mutual Funds

It’s not the best

Anand Kalyanaraman | Updated on November 19, 2014


The close-ended nature of Sundaram Top 100 – Series I could tie you down

Sundaram Mutual Fund’s new fund offer (NFO), Sundaram Top 100 – Series I, is betting that the economic cycle in the country will turn. Inflation and interest rates are expected to moderate while demand and investment are expected to pick up.

This should translate into higher profits for cyclical stocks (whose fortunes are tied to economic cycles). Based on this premise, Sundaram Top 100 plans to invest in 40-45 stocks from a universe of 99 large-cap stocks, most of which will be cyclical.

The stocks will qualify under the Rajiv Gandhi Equity Savings Scheme (RGESS), which offers tax breaks for first-time stock investors. Sundaram Top 100 will be a three-year closed-end fund.

Betting on revival

Sure, an economic recovery could give a leg-up to cyclical stocks. Indeed, expectations of a new Government accelerating the reforms process have already seen many of these stocks racing ahead in recent weeks.

But is Sundaram Top 100 the best way for you to bet on the good run continuing? Consider these factors before you decide.

One, the fund being RGESS compliant, is closed-end for three years. This will tie you down.

If its performance during the three-year period is not to your satisfaction, you cannot redeem your units. Yes, you can sell the units on the NSE where the fund is proposed to be listed. But the trouble is the liquidity of close-ended funds is usually low; this often results in quite a gap between the fund’s net asset value (NAV) and the price at which it quotes, the latter being lower.

Also, in the case of Sundaram Top 100, the units will be redeemed or switched out at the applicable NAV on maturity at the end of three years.

This means that the fund will be closed after three years and you will have to take what you get on maturity without the option of holding on.

Next, even if you are a first timer to equities, investing in a fund just to get tax breaks under the RGESS may not be optimal.

A fund with an established track record is safer than an NFO. There are many time-tested funds with investment themes similar to that of Sundaram Top 100.

For instance, open-end funds such as ICICI Pru Top 100 and Birla Sun Life Top 100 have delivered healthy returns. Finally, Sundaram Mutual Fund has not had the best of runs over the past few years. Many of its funds have just about kept pace with their benchmarks and, in some cases, underperformed.

Published on May 18, 2014

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