HDFC Housing Opportunities Fund Converted into an Open-ended Scheme. Should you invest?

• Real Estate developers

• Financial Services providing housing finance

• Allied business activities such as construction, cement & cement product, chemicals (paints, adhesives, water-proofing chemicals), metals, consumer durables (home appliances, electronic items, furniture & fixtures, etc.), building products (glass, pipes, fixtures/fittings, flooring, electrical products, etc.), among others

It will now be converted into an open-ended equity scheme following housing and allied activities theme. This means that new investors can invest in the scheme without any lock-in restrictions.

What is the reason for conversion?

Though the fund house has not stated the reason for converting the scheme, it is probably due to the poor performance of the scheme since its inception about three years ago.

The scheme has delivered an absolute return of just 3.8% in the last one year. Most open-ended equity schemes have generated double-digit returns during this period. Moreover, its 3-year CAGR return is in the negative zone. Even if the scheme recovers from here, investors in the scheme would hardly break even when the scheme matures on January 18, 2021. Such returns are surprisingly poor for a fund from a reputed fund house.

The scheme has generated poor returns despite having index-heavyweights such as HDFC Bank, ICICI Bank, and HDFC in its top 10 holdings. Notably, the fund has high exposure of around 20% in PSU stocks such as NTPC, SBI, Power Grid Corporation of India, Bharat Petroleum, Petronet LNG, etc.

Since PSU stocks have performed poorly in the past few years due to government's divestment plans, the fund's performance has suffered. The fund also has significant exposure of around 9% in high-risk small cap stocks.

Besides the scheme focuses on the housing and allied sector, a sector that has been marred over the past few years due to various regulatory changes such as Demonetisation, GST, RERA. The COVID-19 pandemic has further hit the segment.

Therefore the growth outlook for the scheme does not look very promising. Besides being a thematic fund, it is a highly risky proposition.

Existing investors should use the free look period available till January 18, 2021, to redeem their holdings in the scheme without exit load. If you redeem the investment after the free look period, an exit load of 1% will be applicable if the units are redeemed within one year from the date of conversion, i.e. January 19, 2021.

Should you invest in close-ended schemes?

Mutual funds often push risky proposition through close-ended funds since the fund managers do not have to worry about volatility and redemptions due to the lock-in period (generally 3-5 years) on these funds.

Do note that for an equity scheme, a 3-year time frame is grossly inadequate to ride out the market volatility and deliver good returns. There have been several instances in the past where close-ended schemes had to roll over (extend) the maturity by another few months or years since the returns at the time of maturity were miserable.

Due to the lock-in restrictions, investors in close-ended schemes do not have the option to exit if the scheme consistently underperforms. On the up side, investors do have the option sell their units on stock exchanges where the scheme is listed. However, the trading volumes are quite low making it difficult to sell the units at its actual NAV.

Performance track record is an important parameter to judge the potential of a scheme. Unfortunately, in case of close-ended schemes, investments are only accepted during the NFO period. Thus, there is no track record to rely upon.

This leaves investors to rely upon the track record of the fund house which is not an ideal way to choose a fund.

[Read: Selecting Mutual Funds Carelessly Can Cost You Dear]

Moreover, the option to invest regularly through the SIP mode, an investment route which allows investors to average out the investment cost and optimise returns through the power of compounding, is not provided.

As there are no inflows and outflows from the close-ended schemes, the portfolio churn is limited. Though this can be advantageous to generate better returns, picking quality stocks at the right valuation and holding it till its full potential is realized have important roles to play.

Remember that with investments in equity mutual fund, a time horizon of 5 years or more can be considered as long term. Further one should have the flexibility to exit the scheme if it consistently lags the benchmark and category peers.

Investors would be better-off avoiding investment in close-ended funds. You should instead prefer investing in existing open-ended diversified equity mutual funds having a consistent and dependable performance track record. The best way to invest in such funds is to do so gradually, by investing through a SIP.

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Warm Regards,
Divya Grover
Research Analyst

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