All about Prudential ICICI Fusion Fund Series - II

Type	Close-ended (3-Yr) Equity: Mid Caps	Benchmark	S&P CNX Nifty
Min. Investment	Rs 5,000	Face Value	Rs 10
Entry Load	Nil	Exit Load	Nil*
Issue Opens	February 15, 2007	Issue Closes	March 16, 2007

* In case of premature withdrawal, proportionate unamortised issue expenses will be recovered from the investor

Investment Objective*

The Scheme is a close-ended diversified equity Scheme, with a maturity period of 3 years, that seeks to generate long-term capital appreciation by investing predominantly in equity and equity related instruments of companies across large, mid and small market capitalization. However, there can be no assurance that the investment objective of the Scheme will be realized.
*Source: Offer document

Is this fund for you?

As the name suggests, Prudential ICICI Fusion Fund Series - II (PIFFS2) is the second offering in the series, the first one being launched in February 2006. The investment proposition offered by PIFFS2 is similar to that of its predecessor. Although, the investment objective may lead investors into believing that the fund will invest in stocks from across market segments, the same isn't entirely accurate. PIFFS2 has been positioned as a fund that will hold a multi-cap portfolio in its initial tenure. However, eventually the fund will evolve into one that invests largely in the mid/small cap segment. Hence over its tenure (3 years), the fund will evolve into a mid/small cap fund. On maturity, the fund will be converted into an open-ended fund.

Also the fund house has thrown in free insurance cover as an add-on benefit for investors (between 18 - 50 years of age) in the scheme, subject to fulfillment of certain terms and conditions. The insurance cover offered is a factor of the amount invested; the minimum and maximum insurance covers have been pegged at Rs 10,000 and Rs 1,500,000 respectively. The insurance cover shall stay valid for a period of 3 years from the date of allotment or till the date of valid redemption of the units, whichever is earlier.

Read what we wrote about the Prudential ICICI Fusion Fund NFO

Personalfn's view on investments mid/small cap stocks:

Typically, mid/small companies tend to be under-researched ones, thereby providing an investment opportunity that is yet to be identified by the market. Investments in such companies offer high growth potential and the opportunity to clock above-average returns over the long-term horizon.

On the flipside, since mid/small-sized companies are often under-researched, there is a fair chance that some reasons for "not investing" could be overlooked. As risk control measures and corporate governance tend to be neglected, the chance of manipulation in such companies is higher. Similarly, the possibility of stocks remaining illiquid even at the end of the investment horizon does exist; this in turn can be an unviable proposition for the fund manager.

Given PIFFS2's close-ended nature (i.e. restricted cash flows), the fund manager can adopt a "buy and hold" strategy and make investments from a long-term perspective. This can prove handy, since mid/small cap stocks can be very volatile investments over shorter time frames, however, they hold the potential to unlock value and deliver over longer time frames.

The mutual funds segment has funds like Franklin Prima and Sundaram BNP Paribas Select Midcap that invest in the mid/small cap segment. More importantly, these funds have proven track records over longer time frames to show for. In light of the same, we recommend that investors give PIFFS2 a miss and instead invest in the aforementioned funds. Meanwhile, they can track PIFFS2's performance over the 3-Yr period and then form a revised view on the fund, when it turns open-ended. Also we advise investors not to attach any weight to the 'free insurance' that has been offered along with investments in the fund.

Portfolio Strategy

PIFFS2 is mandated to invest between 70%-100% of its assets in equities. Also debt and money market instruments can account for upto 30% of the fund's assets.

Instruments	Allocation Range
Equity and equity-related instruments	70% - 100%
Debt and money market instruments	0% - 30%

As mentioned earlier, the fund will initially build a multi-cap portfolio i.e. it will invest in stocks from across market segments. Later on, the portfolio will evolve into its intended form i.e. a mid/small cap portfolio. The intention behind this exercise is to offer the fund manager the opportunity to invest in mid/small cap stocks at an opportune time. PIFFS2 intends to build a core portfolio comprising 30 - 40 stocks.

Fund Manager Profile

Mr. Anand Shah, (B.E. and PGDBM - IIM, Lucknow) is a Senior Fund Manager with Prudential ICICI Asset Management Company (AMC). Before joining the AMC, he was associated with Kotak AMC as Vice President (Funds Management, Equity). He has also had a stint with Kirloskar Oil Engines Limited.

Outlook

Like most other close-ended funds being launched at present, PIFFS2 will also "blossom" into a mid/small cap fund. However, what separates PIFFS2 from the others is its mandate to invest in stocks across market segments, until the opportunity to invest in mid/small cap stocks emerges. This liberty to invest in stocks outside the mid/small cap segment can hold the fund in good stead from a diversification perspective.

Having said that, the fund does intend to hold a concentrated portfolio comprising of stocks from the mid/small cap segment. Such an investment style will accentuate its risk profile. We believe PIFFS2 will be a high risk - high return investment proposition and expect it to perform accordingly.

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