Going cherry picking

The gap between sectors and stocks that have done well in this rally and those that have been brushed aside throws open inviting investment opportunities for long-term investors. Within the CNX 500, more than 70 per cent of the stocks have dropped in market price. Picking quality stocks available at reasonable prices may now be advisable, as a strategy linked to valuations can be rewarding over time.

But there may be a trap in purely going by valuations as a good many stocks are struggling to move up for genuine reasons, such as governance troubles, poor demand, paucity of funds for working capital or investment. Some sectors, such as oil and gas, power and mining also face regulatory obstacles. Stock selection is therefore crucial while scouting for value picks.

Two funds have now been launched, both betting on value stocks, which close on November 29.

Reliance Close-Ended Equity Fund Series A

This fund will invest in stocks that have long-term growth prospects, even if heavy clouds hang over the near term.

Stocks or sectors that aren’t flavour-of-the-season, or are at lows for reasons other than fundamentally business-related ones will also find a place in the portfolio.

The fund will also look for companies with sustainable cash flows, and which have high returns on capital and equity. Debt and money market instruments can go up to 20 per cent of the portfolio. It will be benchmarked against the BSE 200.

This suggests that the fund will follow a mix of growth and value-based investing. It may also be able to avoid going for momentum-driven sectors and stocks, a safer strategy. It will also invest across large-, mid- and small-cap stocks, giving it a broader mandate.

Mid-cap stocks, though, will form about 70-80 per cent of the portfolio. While the fund will focus on the larger end of the mid-cap spectrum, these stocks do carry higher risk. The portfolio will sport around 25-30 stocks, which involves concentrated stock exposures.

The fund has a five-year lock-in period. This does have its advantages — stocks can be accumulated and held for a longer period and there is no risk of redemption due to short-term underperformance. But five years is quite a long period, and ends almost at the cusp of a new election and therefore may have to suffer the effects of volatility.

The fund will be managed by Shailesh Raj Bhan and Jahnvee Shah. Other diversified equity schemes managed by Bhan, such as Reliance Equity Opportunities and Reliance Top 200 have been consistent performers.

ICICI Prudential Value Series II

This fund offer follows the ICICI Prudential Series I, which closed last month. The fund will focus on stocks that are trading at discounts to their intrinsic value. While there won’t be a specific market-cap bias, the fund will tilt towards mid-cap stocks.

It will have a portfolio of 25-30 stocks, resulting in high exposures to single stocks. The fund is close-ended with a lock-in period of three years. This will help in allowing time for stock prices to move up, reflecting their sound fundamentals.

The fund will be managed by Sankaran Naren and Atul Patel.

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