While close-ended schemes have an advantage over open-ended schemes, much would depend on the market valuation when the scheme is launched

ICICI Prudential Value Fund plans to launch a close-ended equity scheme—ICICI Prudential Value Fund. Each series under the scheme will have tenure of three to five years from the date of allotment of units. The scheme would invest a minimum 65% of its portfolio in equity instruments. Investments in equity would be based on a value investment strategy. Value investing requires a great deal of skill and experience. Being a close-ended scheme, the fund manager can invest depending on the maturity period of the scheme. In a close-ended scheme, a fund manager does not have to deal with the inflows and outflows of funds from investors as in the case of open-ended schemes.
However, as in the case of all close-ended schemes, much depends on when these schemes are open for subscription and their maturity period.
 

If the markets are undervalued at the time of the open offer of the scheme, it would be a good time to invest. A five year lock-in is a reasonable time for equity investments. However, the market condition at the time of maturity of the scheme can influence returns substantially. If one does not wish to exit from the equities at the time of maturity, if valuation is low, they can transfer their investment to another scheme with a similar objective. 
 

There are a few mutual fund schemes that term themselves as value funds. Each fund house has its own style and approach to value investing. For example, Tata Equity PE Fund invests in stocks which have a trailing PE less than that of the S&P BSE Sensex. Templeton India Equity Income Fund puts higher weightage on stocks with a higher dividend yield. UTI Master Value Fund, values funds on their potential future earnings. ICICI Discovery Fund follows the same strategy as the new scheme and is an open-ended scheme.
 

The fund management of ICICI Prudential Mutual Fund has a decent track record. ICICI Prudential Discovery Fund, which is an open-ended value based scheme, has delivered superior benchmark related performance. Even compared to its peers, the scheme has been at the top in terms of performance. The scheme also has the highest corpus which is over Rs2,000 crore.
 

Below is how the schemes have performed over a one-year, three-year and five-year period:
 

As part of the stock selection process the new scheme proposes to consider parameters like the price-to book (PB) ratio, price-to-earning (PE) ratio, dividend yields of companies within its researched universe and try to identify companies with low PB and PE ratios and which have declared dividends consistently in the past and show a reasonable certainty of declaring attractive dividends in the future.
 

The fund would also look into other quantitative parameters like return on equity (ROE) and return on capital employed (ROCE) to identify stocks which may be available at more favourable valuations when compared with peer group and stocks in the applicable benchmark. Such stocks picked may be a part of the mid-and small-cap universe. Keeping this in mind, the fund managers would diversify to mitigate the liquidity and concentration risks.
 

The fund does not intend to restrict to only value stocks. The fund may also look at stocks which have in the recent past demonstrated significant price appreciation as a result of improved earnings growth or due to some other reasons. Mittul Kalawadia will be the fund manager of the scheme. He has been working with the fund house for the past seven years.

Other details of the scheme

Benchmark: CNX 500
 

Minimum Amount for Application: Rs. 5,000/- and in multiples of Rs. 10 thereafter
 

Maximum total expense ratio (TER) permissible under Regulation 52(6)(c)(i) and (6)(a)—2.50%
 

Additional expenses under regulation 52 (6A) (c)* (more specifically elaborated below)—0.20%
 

Additional expenses for gross new inflows from specified cities* (more specifically elaborated below)—0.30%