These are part of fundamental attribute changes for the biggest multi asset allocation fund, which manages nearly Rs 12,000 crore investor assets
ICICI Prudential Multi-Asset Fund, the biggest multi asset allocation fund in the MF industry, has announced key changes in fundamental attribute. Along with existing asset classes like equity, debt, gold, REITs and InvITs, the open-ended fund can also now invest in Exchange Traded Commodity Derivatives (ETCD) and Preference Shares. ICICI Prudential Trust Limited (the MF Trustee), has approved change in fundamental attributes of the scheme with effect from closure of business hours on March 28, 2020. On its part, regulator SEBI communicated its no-objection for the above changes through a letter dated February 12, 2020. RupeeIQ takes a closer look at why these changes are important and what they could mean for an investor. Read on.
1) From March 28, ICICI Prudential Multi-Asset Fund will be an open ended scheme investing in equity, debt and exchange traded commodity derivatives (ETCD)/units of Gold ETFs/units of REITs & InvITs/Preference shares. Its list of potential asset classes to exploit have been widened with the addition of ETCD and preference shares.
An exchange traded commodity derivative is a derivative instrument that mimics the price movements of an underlying commodity, allowing an investor exposure to the commodity without physical purchase. Do remember that ETCD products are leveraged instruments and can provide disproportionate gains as well as disproportionate losses to the investor. Execution of investment strategies depends upon the ability of the fund manager to identify such opportunities. ETCDs carry liquidity risks, price risks, and settlement risks.
Coming to preference shares, these are part of a company’s share capital which carry a preferential right to: dividend at a fixed rate or amount; and repayment of capital in case of winding-up of the company. Preference shares carry credit risks, liquidity risks, and market risks. Plus, they are unsecured in nature.
Credit risks emanate from an issuer’s inability to meet dividend and redemption by the issuer. Further, for non-cumulative preference shares, issuer also has an option to not pay dividends on preference shares in case of inadequate profits in any year. Liquidity risks are due to the fact that preference shares lack a well-developed secondary market, which may restrict the selling ability of the scheme and may lead to the scheme incurring losses till the security is finally sold. Also, preference shares are unsecured in nature and rank lower than secured and unsecured debt in hierarchy of payments in case of liquidation. Thus, there is significant risk of capital erosion in case the company goes into liquidation.
2) Due to the above, naturally the asset allocation pattern of ICICI Prudential Multi-Asset Fund needed to be revised.
While the equity & equity related instruments (65-80%) allocation and debt & money market instruments (10-35%) allocation have not been rejigged, units of Gold ETFs/ETCDs will now have an indicative allocation of 10-30%. Earlier, this was 10-35% for gold/gold ETF. Also, preference shares have been given a fresh indicative allocation of 0-10%. Indicative allocation of units of REITs & InVITs remain constant at 0 – 10%.
2) Please note one important change in investment strategy of ICICI Pru Multi-Asset Fund. There seems to be absence of a line used in previous fund documents. “The AMC shall maintain the gross equity exposure of the Scheme at 65% or above in line with the asset allocation” — this line is missing in the notice cum addendum released on February 24. If the fund is unable to maintain the 65% gross equity exposure, it may face taxation issues in terms of getting equity fund treatment. We await further clarity on this.
3) Portfolio turnover of the fund in its new avatar should be focussed upon. This is because ICICI Prudential Multi-Asset Fund says in the notice cum addendum that its portfolio turnover would be impacted by investment strategy of the scheme. If portfolio turnover is too high, this could mean higher costs and consequently higher expense ratio for fund’s investors.
4) Lalit Kumar (for ETCDs) is the addition the fund manager team for this fund. He focuses on tracking commodities and related sectors including Energy and Metals. The other fund managers are Sankaran Naren, Ihab Dalwai and Anuj Tagra. An additional fund manager was required for ETCD investments and so Lalit Kumar’s addition is not surprising.
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