Closed-end funds trading at a discount now may offer 5-15% more at maturity

Investors, however, should keep in mind the tax aspects and low liquidity of these equity mutual fund schemes.

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Looking for bargains in highly-charged, expensive bull market? There may not be many options except in a small corner of the equity mutual fund industry. Several closed-end funds are trading at a discount to NAV giving investors the opportunity to buy into funds holding blue chip stocks at cheap valuations. These funds are available at a 5-15% discount to their net asset value (NAV) on the stock exchanges and the discount could help boost overall returns as redemptions at the end of maturity usually happens at the NAV.

“If you are comfortable with the portfolio of the scheme and it suits your risk appetite, buying it at a 5-15% discount is a good deal,” says Rupesh Bhansali, head (distribution), GEPL Capital.

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  • 9.5 YearsTime taken to double money
For example, HDFC Equity Opportunities Fund, a large-cap fund maturing in July 2020 with a corpus of ₹1,118 crore, trades at ₹9.85 as against its NAV of ₹10.65, an 8.1% discount. The top five stocks in the fund are Infosys, ICICI Bank, ITC, SBI and Reliance Industries.

ICICI Prudential Value Fund – a value fund with assets of ₹1,779 crore maturing in June 2021 trades at ₹9.2 versus an NAV of ₹10.38 a 12.8% discount. Its top holdings are NTPC, ONGC, Hindalco, Vedanta and Indian Oil.

Units of ICICI Prudential Bharat Consumption Fund – Series 2 with assets of ₹267 crore are available at ₹8.79 against its NAV of ₹9.91, a discount of 12.9%. The top holdings in the February portfolio are Titan, Dabur, ITC, United Spirits and Sun Pharma and the fund holds a 45% cash in its portfolio.

“Schemes managed by a fund manager with a good track record should be preferred when investing in such schemes,” says Jignesh Shah, founder, Capital Advisors. He believes investors looking to buy these schemes should calculate the time left for maturity and should buy with the idea of holding till then due to poor liquidity. Investors should also consider the taxation aspect before buying because if there is less than a year left for maturity they would end up paying a 15% capital gains tax, vis-a-vis a 10% if the scheme has more than a year for maturity.

Given that the regulator is very selective in giving permission to new closed-end mutual fund schemes, such opportunities are likely to reduce in the coming months.
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