ICICI Prudential Equity Income Fund

An open-ended equity fund which invests a predominant portion of the assets in equity and equity related instruments and exploit arbitrage opportunities with the aim to meet its investment objective.

Summary

Type	An open–ended equity fund	Benchmark Index	A combination of 30% CNX Nifty + 40% Crisil Liquid Fund Index + 30% Crisil Short Term Bond Fund Index
Min. Investment: Additional purchase:	For Lumpsum -> Rs 5,000 and in multiples of Re 1 for purchases thereafter For Systematic Investment Plan (SIP) - > Rs 1,000 and in multiples of Re 1 thereof plus minimum of 5 post-dated cheques in advance for a like amount or an equivalent auto-debit or standing instruction Rs 1,000 and in multiples of Re 1 thereafter	Plans: Options (under each plan):	Direct; and Regular   Cumulative AEP (Appreciation and Regular) Dividend (Re-investment and Payout)
Face Value	Rs 10 per unit	Expense Ratio:	Upto 2.50%* *Direct Plan shall have a lower expense ratio excluding distribution expenses, commission, etc. and no commission for distribution of Units will be paid / charged under Direct Plan.
Entry Load	Nil	Exit Load:	1.00% for amount sought to be redeemed / switched-out within 18 months from the date of allotment of units Nil for the amount sought to be redeemed after 18 months from the date of allotment of units
Issue Opens	November 18, 2014	Issue Closes:	December 02, 2014

*Direct Plan shall have a lower expense ratio excluding distribution expenses, commission, etc. and no commission for distribution of Units will be paid / charged under Direct Plan.

Investment Objective*

The investment objective of the scheme is “to generate regular income through investments in fixed income securities and using arbitrage and other derivative Strategies. The Scheme also intends to generate long-term capital appreciation by investing a portion of the Scheme’s assets in equity and equity related instruments. However there can be no assurance that the investment objectives of the scheme will be realized.”

*Source: Scheme Information Document

Is this fund for you?

ICICI Prudential Equity Income Fund (IPEIF) is positioned as an equity scheme, as a dominant portion of the assets will be deployed in equity and equity related instruments. However in the endeavour to meets its investment objective, IPEIF may exploit arbitrage opportunities to derive returns from the implied cost of carry between the underlying cash market and the derivatives market. You see, the equity market is not always efficient. There could be mispricing in the derivative market and the underlying cash market, and that’s where arbitrage opportunities exist which enables to make gains which can be higher than the short-term interest rates with minimal active price risk on equities. In case where such opportunities do not exist or for defensive consideration and where income opportunities are available, IPEIF may also invest in debt & money market instruments taking into account macroeconomic conditions.

You see, exploiting arbitrage requires time and skills. Not all investors can do it. Investing in the aforementioned manner in the endeavour to achieve the investment objective permeates risk such as:

• Lack of opportunity available in the market;
• The risk of mispricing or improper valuations and the inability of derivatives to correlate perfectly with underlying assets, rates and indices; and
• Execution risk
   

So mind you, the success of such a unique offering is contingent upon:

• Market volatility (which facilitate arbitrage opportunities);
• Ability of fund houses to get access to real time market data
• Risk-free rate of return; and
• Income opportunities
   

Market volatility and risk-free returns are the factors that are beyond the control of the fund manager. Thus there is no guarantee that there will always be arbitrage opportunities available. This therefore leaves some margin for error.

Hence, before you decide to invest in such an offering which has been the favour since the last couple of months and is comparable to MIPs, but in an exotic way; be sure you well-acquainted and know your risk profile. IPEIF is appropriate for those with a moderate-to-high risk appetite.

Portfolio & Investment Strategy

IPEIF for the equity portion of the corpus intends to invest in stocks which are bought typically with a medium to long-term time horizon. The fund intends to minimise stock specific risk by investing only in those companies that have been thoroughly analysed by the fund management team. IPEIF may also use various derivatives and hedging products from time to time, as would be available and permitted by SEBI in an attempt to protect the value of the portfolio and enhance investors’ interest. IPEIF will actively manage its portfolio depending on the market scenario. In a scenario where equity markets appear attractive the indicative asset allocation could be like:
 

Asset Allocation	Indicative Percentage Allocation
Equity (a)	40
Equity Arbitrage (b)	30
Total Equity (a) + (b)	70
Debt	30

(Source: Scheme Information Document)

While in a scenario where the equity markets seem expensive, IPEIF may reduce their allocation to equity and actively use arbitrage and cash to hedge the portfolio thereby generate lower volatility while clocking returns. The indicative allocation in such a scenario could be like:
 

Asset Allocation	Indicative Percentage Allocation
Equity (a)	20
Equity Arbitrage (b)	50
Total Equity (a) + (b)	70
Debt	30

(Source: Scheme Information Document)

You see, the IPEIF will decide the attractiveness and expensiveness based on market valuations parameters such as price-to-earnings and price-to-book value. Based on the valuations derived from the stated financial parameters, if the markets are expensive, then considerable equity exposure will be hedged based on the asset allocation provided. When the markets are attractively valued, then net long equity exposure will be higher.

While tapping arbitrage opportunities, IPEIF will do index arbitrage and cash futures arbitrage. It is noteworthy that the Nifty Index futures giving rise to arbitrage opportunities. The fund manager shall aim to capture such arbitrage opportunities by taking long positions in the Nifty Index futures and short positions in the synthetic index. However, the strategy is attractive if the price differential (post all costs) is higher than the cost of capital. In cash future arbitrage, IPEIF would look for market opportunities between the spot and the futures market. The cash futures arbitrage strategy can be employed when the price of the futures exceeds the price of the underlying stock. The Scheme will first buy the stocks in cash market and then sell in the futures market to lock the spread known as arbitrage return. Buying the stock in cash market and selling the futures results into a hedge where the scheme has locked in a spread and is not affected by the price movement of cash market and futures market. The arbitrage position can be continued till expiry of the future contracts. The future contracts are settled based on the last half-an-hour’s weighted average trade of the cash market. Thus there is a convergence between the cash market and the futures market on expiry. This convergence helps the scheme to generate the arbitrage return locked in earlier. However, the position could even be closed earlier in case the price differential is realised before expiry or better opportunities are available in other stocks.

In case where such arbitrage opportunities do not exist or for defensive consideration and where income opportunities are available, IPEIF will identify fixed income securities which offer a superior level of yield at lower level of risks. The risk will be controlled through in-depth credit evaluation which includes the operating environment of the issuer and the short as well long-term financial health of the issuer. The rated debt instruments in which IPEIF will invest be of investment grade as rated by a credit rating agency and the fund house will be guided by only rating agencies which are approved by SEBI. In addition the investment team of the fund house will study the macroeconomic environment, political environment and factors affecting liquidity and interest rates; thereby to predict the likely direction of interest rate and thus take position on the portfolio appropriately.

Broadly the asset allocation which IPEIF will follow is as under:

Instruments	Allocation Range (%)		Risk Profile High/Medium/Low
	Minimum	Maximum
Equity and Equity Related Instruments	65	75	Medium to High
Derivatives including Index Futures, Stock Futures, Index Options, Stock Options, etc.*	30	50	High
Debt, Money market instruments & Cash$	25	35	Low to Medium

*The exposure to derivative shown in the above asset allocation tables would normally be the exposure taken against the underlying equity investments and in such case, exposure to derivative will not be considered for calculating the gross exposure. The net long equity exposures will be between 20% to 40% of the net assets of the Scheme. This net long equity exposures is aimed to gain from potential capital appreciation and thus is a directional equity exposure which will not be hedged. The cumulative gross exposure to equity, debt and derivatives positions shall not exceed 100% of the net assets of the Scheme.

$ Including securitized debt of upto 50% of debt portfolio.

(Source: Scheme Information Document)

The performance of IPEIF will be tracked against a combination of indices being 30% of CNX Nifty + 40% CRISIL Liquid Fund Index + 30% CRISIL Short Term Bond Fund Index.

Fund Manager Profile

The equity portion of the fund’s portfolio will be managed by Mr Sankaran Naren and Mr Chintan Haria, while the debt investments and foreign investments (which includes ADRs / GDRs) will be managed by Mr Manish Banthia and Mr Shalya Shah respectively.

Mr Sankaran Naren has a work experience of almost two decades in the capital market. He was the CEO of Yoha Securities, and then moved on to HDFC Securities as the Vice President, where he went on to become a director and then COO of the organisation. Before joining ICICI Prudential Mutual Fund he was heading Research at Refco Sify Securities India Pvt. Ltd. He holds B.Tech degree (from IIT Madras) and has to his credit a PGDM from IIM Calcutta. At ICICI Mutual Fund he co-manages ICICI Prudential Dynamic Plan, ICICI Prudential Top 100 Fund, ICICI Prudential Value Fund (Series 1, Series 2 and Series 3).

Mr Chintan Haria joined ICICI Prudential Mutual Fund as a Management Trainee in October 2005 and rose to ranks to become the Associate Vice President (AVP) - Fund Manager at the fund house. He holds a post-graduate degree in commerce (M.Com), Masters in Financial Analysis (MFA), is a Chartered Accountant, Management Accountant, and a CFA (from ICFAI). At ICICI Prudential Mutual Fund he manages ICICI Prudential Tax Plan, ICICI Prudential Child Care Plan – Gift Plan (equity portion) and co-manages ICICI Prudential Value Fund – Series 3 with Mr Sankaran Naren.

Mr Shalya Shah is associated with ICICI Prudential Mutual Fund since May 2013. Before, he was with Accenture Services Private Ltd. He holds a bachelor’s degree in IT (B.E. – IT) and Post Graduate Diploma in Management with specialisation in Finance (PGDM - Finance). At ICICI Prudential Mutual Fund he manages ICICI Prudential U.S. Bluechip Equity Fund (U.S. portion), ICICI Prudential Indo Asia Equity Fund (Asia Portion) and ICICI Prudential Global Stable Equity Fund.

Mr Manish Banthia has a little over a decade of experience. Prior to joining ICICI Prudential Mutual Fund in October 2005, he has worked with Aditya Birla Management Corporation Ltd. and later in Aditya Birla Nuvo Ltd. He holds a bachelors’ degree in commerce (B.Com), Masters’ in Business Administration (MBA) and is a Chartered Accountant. At ICICI Prudential Mutual Fund he manages ICICI Prudential Short Term Plan, ICICI Prudential Ultra Short Term Plan, ICICI Prudential Long Term Plan, ICICI Prudential Gold Exchange Traded Fund, ICICI Prudential Regular Gold Savings Fund, ICICI Prudential Income Opportunities Fund, ICICI Prudential Income Plan, ICICI Prudential Monthly Income Plan (debt portion), ICICI Prudential MIP 5 (debt portion), ICICI Prudential Child Care – Study Plan (debt portion), ICICI Prudential Balanced Fund (debt portion), ICICI Prudential Balanced Advantage Fund (debt portion), ICICI Prudential Equity Arbitrage Fund (debt portion) and ICICI Prudential Blended - Plan A (debt portion).

Fund Outlook

As per the mandate, IPEIF invests a predominant portion of its assets in equity related instruments. But it also explores arbitrage opportunities and hedge positions in in equity and equity related instruments in the endeavour to achieve its investment objectives. But the returns generate by the fund will be contingent upon market volatility (which facilitate arbitrage opportunities), ability of fund houses to get access to real time market data, risk-free rate of return; and income opportunities. Market volatility and risk-free returns are the factors that are beyond the control of the fund manager. Thus there is no guarantee that there will always be arbitrage opportunities available. This will always leave small margin for errors.

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