Reliance Dual Advantage Fixed Tenure Fund IV Plan C

Transcription

1 Reliance Dual Advantage Fixed Tenure Fund IV Plan C (A Close Ended Hybrid Scheme) NFO Opens: 17 th September 2013 NFO Closes: 30 th September 2013 NFO Price: Rs.10 Per Unit Reliance Dual Advantage Fixed Tenure Fund IV Plan C is a 1104 Days, close-ended hybrid scheme that seeks to generate returns and reduce interest rate volatility, through a portfolio of fixed income securities that are maturing on or before the maturity of the Scheme along with capital appreciation through equity exposure. A strategy of investing predominantly into fixed income instruments and investments into long call options has the potential to deliver equity market returns on the upside (when equity markets are positive) while attempting to limit the loss on the downside (when equity markets are flat-to-negative). The investment strategy of Reliance Dual Advantage Fixed Tenure Fund IV - Plan C would be to invest into a combination of fixed income instruments and long call option. Accordingly, around 80% of the assets would be invested into fixed income instruments, mostly maturing in line with the tenure of the fund, and the remaining in long call options. The strategy on Long call options would be a mix of tactical (short to medium term view) as well as fundamental approach (long term view) to investing. Call options will have the varying maturities (typically in Dec 2014 & June 2016 call options). While the June 2016 option would be based on the fundamentals of the economy, the investments in Dec 2014 (or such similar short term call options) would be done with the objective of profit booking in the light of the markets becoming favorable during June 14 Dec 14 time period due to election season. Furthermore the profit booking would also be done at predefined levels as per the discretion of the fund manager so as to lock in the appreciation and optimize the returns. As a result, this strategy would lead to; Diversification of risk by investing across maturities against investing everything in just one call option Trying to capture the long term as well as the short term upside of the market

2 Optimizing the returns through profit booking at various levels on partial portfolio while having a buy to hold focus on the rest half of the portfolio The endeavor of the fund would be to provide exposure to equity through options while protecting the capital in the downside. Thus, the fund can be considered as oriented towards capital protection in the downside while still providing the investors the opportunity to gain from the equity markets. Positioning of RDAFTF IV Plan C The fund will invest upto 80%-95% in assets in Debt Securities & Money Market Instruments and 5% - 20% in Equity & Equity Related Instruments. Being a close ended, passively managed fund, the benefits of locking in at the current high levels in a high inflationary scenario can be reaped as liquidity & inflationary scenario improves. 3 years may be an appropriate time frame for equity as an asset class to deliver healthy returns. Who should invest? Ideal for investors who can lock-in their capital for 3 years and seeking equity market returns on the upside with an endeavor to minimize losses on the downside. Superior Post Tax Returns & Indexation Benefits From a post-tax perspective, mutual fund units score over fixed deposits, especially for those investors who are in the highest tax bracket, as illustrated in the following example, wherein the same pre-tax return of 10.00% has been assumed for fixed deposits and mutual funds. Taxable Income Bank FD & Bond RDAFTF Tax Rate 30.9% 20.6% Pre- Tax Returns* 10.00% 10.00% Post- Tax Returns* 7.11% 9.38% *CAGR returns Indexation benefit shall also be applicable to the investor which shall help him in adjusting the Long Term Capital Gains for inflation by applying an appropriate factor from Cost Inflation Index (notified by Govt), to the original investment. Indexation helps to lower capital gains and hence lower the tax. How does the Fund work? The fixed income allocation to the portfolio would be predominantly deployed into securities maturing on or before the maturity of the fund. The strategy would be to buy-and-hold the

3 securities, thereby minimizing any interest rate volatility. Therefore, the fixed income portion of the investment would be largely on an accrual basis. The equity portfolio exposure would be primarily in long call options on Nifty, expiry of such options would be within the maturity of the scheme. It would allow investors to participate in the underlying equity market (Nifty), often in multiple times due to the benefits of leverage. A combination of investments into fixed income instruments and long call option would allow investors to gain from the upside in the equity markets while attempting to limit the loss on the downside. Payoff from buying a call A trader who believes that a stock's price will increase might buy the right to purchase the stock (a call option) rather than just purchase the stock itself. He would have no obligation to buy the stock, only the right to do so until the expiration date. If the stock price at expiration is above the exercise price by more than the premium (price) paid, he will profit. If the stock price at expiration is lower than the exercise price, he will let the call contract expire worthless, and only lose the amount of the premium. A trader might buy the option instead of shares, because for the same amount of money, he can control (leverage) a much larger number of shares. The buyer of a call option would have unlimited upside from positive movements in the underlying stock or index while the downside is limited to the extent of the premium paid to buy the option. Illustration Consider the case of an investment of Rs. 100 in the Dual Advantage Fund, out of which approx. Rs. 81 is invested into fixed income instruments and the remaining Rs. 19 is used to buy long call options. Following is an illustrative working of the possible returns out of investments in the fund assuming the fixed income investments are made at 9.90% compounded over 3 years while the remaining Rs. 19 is used to purchase call option with the varying maturities (typically in Dec 2014 & June 2016 call options) Allotment 04/10/2013 Maturity 12/10/2016 Market growth 15% CBLO Rate 6% Current Nifty value (10/9/13) 5,890 Option Strike Price 5,800

4 Total Amount of Investment Investment in Fixed Income Instruments Investment in Long Call Options No. of Years 3 Assumed Rate of Return in Fixed Income Instruments (CAGR) 9.90% Value of Fixed Income Investment at the end of tenure Options Expiry Dec 14 Jun 16 Current Nifty value (10/9/13) 5,890 5,890 Option Premium Price Option Strike Price 5,800 5,800 Leverage achieved Participation Equity market participation 61% 36% 97% Assumed growth in Nifty (CAGR) 15% 15% No of days invested from date of allotment Closing value of Nifty Gain on options investment 86 1,608 Total value of investment in options 1,036 3,068 Equivalent total value of investment for Rs. 9/10invested in options CBLO /Bk CD Rate 6.00% 6.00% Option Final Value after investing in CBLO/Bank CD Total cost of options 19.0 Total value of investment in options Investments from June 16 to maturity date 133 days (June 16 to Oct 16) 1 Total Value of investment 139 Total Cost of investments 100 Absolute Return 38.76% Total Return on Investment in CAGR 11.54% As it could be inferred from the above table, the fund provides equity exposure in a rising market while protecting the capital in the downside, making a strong case for investment for 3 years tenure.

5 Reliance Dual Advantage Fund Fixed Tenure Fund Performance Inception date NAV (11-Sep-13) Since Inception Benchmark Reliance Dual Advantage FTF II - Plan A 05/03/ Reliance Dual Advantage FTF II - Plan B 11/04/ Reliance Dual Advantage FTF II - Plan C 07/05/ Reliance Dual Advantage FTF II - Plan D 06/07/ Reliance Dual Advantage FTF II - Plan E 07/08/ Above table shows the returns of other similar Reliance Dual Advantage Funds which were launched earlier. All the schemes have outperformed Benchmark.