First-time investors should avoid closed-end funds

Seasoned investors can take limited exposure to HDFC MF’s latest offering

Closed-end mutual funds serve two purposes: One, they do not allow the investor to time the market, or exit if things get too volatile. Two, since the corpus is locked in for three years or more, the fund manager gets enough time to give returns to the investor because he can take medium-term calls without worrying too much about the investor’s risk appetite.

What is interesting about HDFC Mutual Fund’s latest closed-end scheme is its focus on only the housing sector. The scheme, HDFC Housing Opportunities Fund, is a three-year closed-end scheme, and as the name suggests, it will invest in stocks related to housing and allied business activities.

Given its focus on the real estate and related sectors, financial planners feel this scheme is not meant for first-time investors. Any investor who does invest should have only 5-10 per cent exposure in his portfolio to this fund.

“The investor should be clear this isn’t a real estate fund but a thematic one, which will invest across sectors that benefit from the boom in housing,” says Vidya Bala, headmutual fund research, FundsIndia. “Having said that, this is a closed-end fund. One is not sure if the investor is entering at the right time. This is one of the elements of risk in this fund,” she adds.

HDFC Housing Opportunities Fund will follow a bottom-up stock picking strategy and will be a diversified one, with holdings across businesses covered under the housing theme and across various market caps. “We want to invest in the entire value chain, which includes sectors like paints, steel, cement, plywood, housing financing companies, etc. We would like to invest in companies across these sectors wherever we see good investment opportunities,” says Srinivas Rao Ravuri, senior fund manager, HDFC Asset Management Company.

In recent times, there have been closed-end funds from Aditya Birla Sun Life MF, ICICI Prudential MF and Canara Robeco MF, among others, which were on the theme of recovery and opportunities in the Indian economy. Such funds have given returns in the range of 35-40 per cent in the past one year, according to data from Value Research. On the other hand, broader indices have given returns of around 30 per cent in the last one year.

This scheme will focus more on the low-cost and affordable housing business that will benefit from the expected housing boom.

“We believe that the housing sector is likely to be a big growth driver for the economy. Affordability of housing has improved with stable prices, improvement in income levels, and decline in mortgage rates. The ‘Housing for All by 2022’ programme of the government has started gaining momentum. The government is also providing support in the form of direct subsidies and cheaper loans to achieve its target,” says Ravuri. The Nifty Realty Index is up 99.75 per cent over the past one year.

Despite the positive outlook, analysts and financial planners say this type of fund is for seasoned investors only. “Veteran investors may invest in it. This kind of fund is not for first-time investors, especially when market valuations are so high,” says Pankaj Mathpal, founder and managing director, Optima Money Managers.