In any market, some fund ideas perform better than others. Three new launches try to capture the upside for investors in today?s range-bound volatile markets. Should you invest in them?
Choppy markets have led to brainstorming by investors and fund managers alike. While investors are analysing debt funds and fixed-income products that will protect their wealth and offer single-digit returns, fund managers are devising newer products to lure investors back to equities. Three funds that have hit the markets this month are JP Morgan India Alpha Fund, IDFC Mutual Fund?s Strategic Sector (50-50) Equity Fund and ICICI Prudential S.M.A.R.T. Fund. While the first two are first-of-their-kind products, ICICI?s fund is based on the equity-linked derivative strategy, which too is a fairly new concept.

JP Morgan India Alpha Fund
JP Morgan India Alpha Fund is like an equity fund but differs in its style of investment. Unlike a typical equity fund that takes a call on the direction of one scrip at a time, Alpha Fund will follow the derivative strategy and invest in paired trades. The scheme does not have any benchmark and was open for subscription from July 31 to August 29.
How it works. The fund manager will take equal and opposite calls on two different scrips. He will identify two stocks that will be disproportionately punished or rewarded by developments. For instance, if the price of steel rises, it will positively affect steel-producing companies and adversely affect steel consumers. With the rise in steel prices, the stock of a company like Tata Steel will rise (since with rise in price, profits will increase) while that of companies like Bajaj Auto and Tata Motors, which are consumers of steel, will take a battering (if they are unable to pass on the rise in steel prices to customers). In case of this example, the fund manager will buy derivative futures to lock in the gains that would come from the rise in price of Tata Steel, and from the fall in price of Bajaj Auto or Tata Motors. The fund manager will identify five to 10 such pairs and try to ensure good returns.
Risks involved. The results will depend on the fund manager making the right bets. There is an inherent risk of losing money if the calls are wrong.

According to Krishnamurthy Vijayan, whole-time director and chief executive officer, JP Morgan Asset Management, ?About 150 future options are available. We will invest in the futures of the most liquid stocks and make 5-10 pairs that follow different economic trends. We expect the markets to remain choppy for the next 18 months and hope to make the best use of such times with the right calls,? he adds.
What experts say. ?This is a risky category. If the call goes wrong, you are hit twice over,? says Juzer Gabajiwala, head of mutual fund distribution, Ventura Securities. ?It is hard to take a call on this fund right now as it has no track record of performance. One needs to monitor its performance and then evaluate. At present, this fund should be avoided,? he adds.
As this fund is akin to derivative trading that involves taking positions and betting on a sector?s/stock?s performance, a retail investor who does not understand derivatives should not venture into it. The fund house, too, is fairly new and is yet to prove its mettle in the Indian markets.

IDFC Strategic Sector (50-50) Equity Fund
This is a structured product in equity and is designed to allow an investor the benefit of diversified equity funds as well as sectoral funds under one plan. It is an open-ended equity fund that will invest up to 50 per cent of its assets in companies across sectors and market capitalisations, and the balance 50 per cent in one sector. The fund is benchmarked against the Nifty.
How it works. The fund manager will study the market conditions to gauge which sector will benefit from the present circumstances. Based on this, 50 per cent of the corpus will be invested in the chosen sector. ?If you analyse the market data over the years, you will note that there has been a sector that has predominantly outperformed the market. Our aim is to generate long-term capital appreciation by spotting the leading sector for each year. This structure allows the fund to take concentrated positions in companies in a particular sector and benefit from positive movement in a sector,? says Kenneth Andrade, VP Equities, IDFC Mutual Fund. ?Our choice of sectors will be limited to the core part of the Indian economy. It might include banking and financial services, capital goods, oil and gas, information technology, auto and real estate,? he adds. The remaining corpus will be invested 65 per cent in equity and 45 per cent in debt instruments, just like in a normal diversified equity fund.
Risks involved. This fund, too, has a fair probability of losing out if the fund manager bets on the wrong sector, or fails to latch on to the upward trend in a sector early enough. ?Risk is commensurate with returns. There is a concentration risk involved in this fund. If our calls go wrong, we might lose out on returns. Since it is an aggressive diversified fund, we can say that the risk is higher than that of an aggressive fund but lower than that of a sectoral fund,? says Andrade.
What experts say. While there is a possibility that the fund manager could go wrong on the sector and carries higher risk than a diversified sector fund, it is a good concept. ?Compared to an individual investor, the fund manager will be better placed to take calls on which sector will outperform. The fund house also has a good track record. This fund will allow the investor the flexibility to move from one sector to another without redeeming his investments,? says Gabajiwala.
First timers should, however, not consider this fund. Investors who already have a fair amount of exposure to equities, and investors who would like to take advantage of sector funds but are not in a position to identify which sector to invest in, may consider this fund. ?One can allocate a small amount, not more than 5-10 per cent of the equity portfolio in this fund,? says Gabajiwala.
Pune-based financial planner Veer Sardesai, though, differs. ?Essentially the risk is high as the fund house is trying to marry a sectoral fund to a diversified equity fund. I still think an index fund is the best way to get a diversified portfolio and earn good returns over a period of time.?

ICICI S.M.A.R.T. Fund
ICICI Prudential?s S.M.A.R.T. fund is a structured debt scheme that will invest up to 95 per cent in equity-linked debentures (ELD). ELDs are floating rate debt instruments whose coupon (interest) is based on the return of the underlying equity index, which in this case is the Nifty. Up to 100 per cent could be invested in investment grade debt securities with fixed and floating rate. There are two plans on offer – 24 months and 36 months. The new fund offer opened on August 18 and will close on September 19.
How it works. The fund will invest chiefly in fixed-tenure debt instruments and in debentures linked to the Nifty. These debentures will give you an average increase in the Nifty over the time frame, while at the same time protecting you against any downturn. Say, for example, you enter when the Nifty is at 4,000. Then during the tenure of the plan, it moves on to 5,000, then your returns will be calculated against 5,000. For instance, if the Nifty, when you invested, was, say, 4,000 and it climbs to, say, 5,000 by the time of maturity, then you may receive 25 per cent return (5000-4000/4000=25%) as interest on your product. It must be noted that this is a simplified example and calculations can be a lot more complex.
Secondly, if the Nifty slips below 4,000, you do not lose your capital and will receive your principal amount back with zero interest (after deducting applicable charges). The fund will let you participate in the equity market if it moves up, but you do not lose your capital if it goes down. However, an investor has to stick through the entire tenure of the plan to get the returns.
If an investor invests in these schemes their downside risk of capital erosion is protected (promised and not assured) and on the upside, they may get a return in-line with the appreciation of Nifty. ?This plan is well suited for a conservative investor. The plan will allow him exposure to equities, which is essential for wealth creation, and also preserve his capital,? says Nimesh Shah, managing director, ICICI Prudential AMC.
Risk involved. Although no market risk is involved, there is credit risk on the issuer of debentures. However, this risk is minimised because investments will be made mainly in AA+ and AAA rated papers. Another risk relates to time value of money. If after 24 or 36 months, all you get back is your principal, then you would have done better off investing in a fixed-return instrument.
What experts say. ?The advantage of this fund is that presently market sentiment for equity is very low and most investors have a bias towards fixed maturity plans and bank deposits. This is, therefore, a structured product wherein there is a possibility of a limited upside in case the markets go up, while and the downside risk is protected. The returns will be range bound between 8-20 per cent per annum,? says Gabajiwala. ?However, all structured products are fairly new and have no history. The calculations are presently all on paper. One needs to see how these products perform in reality. Second, it is more of a close-ended scheme even though it has a half-yearly exit option,? he adds.
All these funds are based on novel concepts that are yet to prove themselves in the market. Whatever proof fund houses put forward in favour of these concepts are based on back-testing using past data. But the markets have a nasty habit of proving concepts, which in theory appear sound, wrong. If you are a conservative investor, stick to simple index and exchange-traded funds and actively managed equity funds with a proven track. When markets revive, you will be amply rewarded for your faith in straight forward equity products. By investing in these untested products, you may have to pay a heavy price for allowing the novelty bug to bite you.