Fund Review: Reliance Natural Resources Fund

Launched in 2008, Reliance Natural Resources Fund is yet to show its mettle

   RELIANCE Natural Resource Fund is renowned in the mutual fund (MF) industry for creating an euphoria at the time of its inception. Launched at the peak of the bullrun — in January 2008 — the fund, whose name also coincides with one of the Reliance group companies, had set a new record by garnering about Rs 5,660 crore in its new fund offer (NFO) period.

PERFORMANCE    

Notwithstanding its initial euphoria, Reliance Natural Resources' (RNR) performance so far, has failed to impress. With the fund's launch coinciding with the market meltdown of 2008, it was almost impossible for investors to anticipate any returns from this fund in the very first year. In fact, the initial investors actually ended up losing about 41% of their capital invested into the fund in 2008. The only saving grace in its first year was probably the fact that despite its losses, RNR was better off than the major market indices —Sensex and Nifty — that lost about 46% and 44% in the period.

   However, the fact that the fund failed to make an impressive recovery even in the following year is probably turning down its investors. RNR managed to return just about 73% last year even as the Sensex and the Nifty returned about 81% and 76%, respectively.

   As this fund has a customised benchmark index, which has been created using BSE 200 index to the extent of 65% of the portfolio and MSCI World Energy index for the balance 35% of the portfolio, it is difficult to compare its performance vis-à-vis a particular index. However, even if one were to consider the performance of BSE 200 last year, the same has returned about 89%, way ahead of RNR's returns for the period.

   In 2010 too, so far the fund has lost about 3.5% of its NAV as compared to a decline of 2.1% and 1.5%, respectively, in the returns of the Sensex and the Nifty. So those who were carried away by the jubilation of the Reliance banner in January 2008, have today earned just about 0.8% returns on their initial investment — implying that Rs 10 invested in RNR about two years ago has grown to just about Rs 10.08 today.

PORTFOLIO    

Given the fund's performance and the market volatility, which has definitely impacted the fund's valuations, it is little surprising to see the fund's assets under management (AUM) shrink from over Rs 5,600 crore to about Rs 3,900 crore in a span of just two years since its launch. The corpus has been used by the fund to invest in both the Indian and the foreign equities as well as in units of foreign MFs.

   Among the fund's Indian holdings, most of the stocks incorporated in the portfolio currently have been acquired by the fund in 2008. An analysis of the fund's portfolio over a period of time shows its inclination to hold the stocks for the long term with occasional churning of the portfolio. However, despite its philosophy of long-term investments, only about 55% of the fund's picks are currently in the positive terrain today since the time these were last invested into by the fund.

   Some of the fund's timely picks that have turned out to be highly profitable include BEML, GAIL, BPCL, IOC and Triveni Engineering. However, those that are currently trading below their cost of acquisition include Punj Lloyd, Tata Power, Reliance Infrastructure and RIL among others.

OUR VEW    

Reliance Natural Resources is a sectoral fund and just like any other theme based fund, it carries the risk of a concentrated portfolio. A diversified equity fund is thus a far more preferred option to mitigate the risks arising out of market volatility. While Reliance fund house has many popular and successful sectoral funds too, RNR is yet to establish itself in the league of its siblings like Reliance Diversified Power. It is also important for the investors to note that investing in an NFO always carries a higher degree of risk as compared to an investment in any well-established fund, since an NFO doesn't have a performance record to justify an investment.