Weekly Musings – NFO Pick (Bandhan Innovation Fund)

9 Apr 2024 , 10:12 AM

THE 3 WHYS OF BANDHAN INNOVATION FUND

One of the big questions that arises in the minds of investors is; why an innovation fund and why an innovation fund now. We will answer this question in 3 parts.

• Why the focus on innovation? Innovation, today, it not only at the core of survival but also of future gains. Innovation can be used for a new product idea or a new optimization technique. It is revenue and margin accretive on a non-linear basis.
• Why the focus on innovation now? There are several initiatives taken by the government which has acted as an innovation booster. On the innovation index, India’s rank has jumped from 81 to 40; with innovation most likely in digital media, finance, and retail.
• What is the USP of the Bandhan Innovation Fund? Bandhan Innovation Fund opens the up opportunities in the innovators and path breaking companies of tomorrow. The focus will be on innovators with strong brands, higher margins, differentiated products etc.

The current government has shown a strong commitment towards fostering innovation and that is likely to be value accretive to such innovative companies in the coming years.

WHOM IS THE BANDHAN INNOVATION FUND SUITABLE FOR?

The positioning of the fund is quite unique as it is a thematic fund with potential innovation opportunities as the theme.

• The fund, being a thematic fund, will be suited for investors with a higher risk appetite and having the capacity to wait for 5-7 years so that the full benefits of the innovation cycle can be reaped.
• The innovation theme is likely to have high rate of attrition along the way. Hence, this fund is best suited to investors with a longer term horizon, confidence in the AMC and its management as well as those adopting a SIP based investment approach.
• It is not designed to be part of the core portfolio aimed at long term goals. Instead, the Bandhan Innovation fund is best suited to addition in the satellite portfolio, where the investors is willing to take on higher for the sake of that alpha edge in the market.

The fund calls for patience and persistence over time, ideally through the SIP model. A lot will depend on the conviction that the investors has in the fund.

DO INNOVATIVE COMPANIES COMMAND A HIGHER P/E RATIO?

Innovation is a tough game in the market because attrition of ideas is high, iterations are high and success rate is low and back-ended. However, you would find that these innovative companies have some common characteristics. Typically, innovative companies entail skilled employees and have high employee costs. Most of their business models are non-linear, which means concepts like the network effect work strongly such that growth is geometric rather than arithmetic. The innovative companies have a higher potential for growth and higher margins due to their unique innovative focus.

In addition, these innovative companies also differentiated products / services and hence also command a good brand value. Today strong brands impact the pricing power in any industry positively. One more feature of these innovative companies is the high ratio of R&D spending to sales as they need to build an internal culture of innovation. Due to a combination of the above factors, it has been observed that innovative funds tend to command higher premiums compared to other regular companies. That is reflected in higher P/E valuations assigned to such companies by the market.

INVESTMENT FRAMEWORK OF BANDHAN INNOVATION FUND

How will the investment framework for the Bandhan Innovation Fund look like? Here are 3 focus areas of the fund.

• It will focus on Leading Innovators. These are industry leaders with high R&D thrust. They prise open new markets and hence have a high market share in the industry. Typical industries they operate in include internet, software, pharma products etc.
• The second category of focus will be the Rising Innovators. These comprise of the companies that leverage the innovation and even scale it up to gain an edge in the market. The have a continuous focus on improving the existing product. These companies are found in healthcare, financial services, and consumer discretionary.
• Finally, there are the Emerging Innovators. These are the companies that create products by identifying market gaps. They may have low market share but high growth. These are most common in commodity related sectors.

In terms of allocation, Bandhan Innovation Fund will allocate 35% to 45% of its funds to leading Innovators; 35% to 45% of its corpus to Rising Innovators; and 10% to 30% of its corpus to Emerging Innovators.

PERFORMANCE OF INNOVATION FUND PROXIES IN INDIA

Here is a quick look at the open ended Innovation Fund proxies in India as of April 05, 2024. These are CAGR returns for beyond 1 year, and pertain to direct plans. Also, since Innovation Funds are not a distinct part of thematic fund categories, we have culled out proxies that closely match an innovation fund.

Scheme Name	NAV (in ₹)	Return (%) 1-Year	Return (%) 3-Year	Return (%) Launch	Daily AUM (₹ Crore)
Aditya Birla Sun Life Digital India Fund	173.63	33.27	17.70	22.20	4,609.15
Aditya Birla Sun Life ESG Integration Strategy	15.80	31.01	14.36	14.95	687.91
Aditya Birla Sun Life India GenNext Fund	209.01	36.86	20.67	18.03	4,857.08
Aditya Birla Sun Life Special Opportunities Fund	21.93	47.18	20.88	25.54	716.46
Axis ESG Integration Strategy Fund	20.60	33.85	14.16	19.03	1,378.83
Axis Special Situations Fund	16.79	40.03	17.11	17.10	1,222.57
Canara Robeco Consumer Trends Fund	108.10	41.90	22.25	18.11	1,434.69
Franklin India Technology Fund	507.94	60.66	19.03	20.66	1,427.47
ICICI Prudential ESG Exclusionary Strategy Fund	19.57	41.50	18.45	21.21	1,426.06
ICICI Prudential India Opportunities Fund	32.39	54.98	33.22	25.23	18,417.98
ICICI Prudential Technology Fund	190.62	31.16	16.95	22.45	12,049.09
Kotak ESG Exclusionary Strategy Fund	16.20	35.77	15.48	15.66	994.24
Mirae Asset Great Consumer Fund	93.88	41.74	23.72	18.81	3,220.34
Quant ESG Equity Fund	33.09	55.68	34.23	41.99	242.11
Quantum ESG Best In Class Strategy Fund	22.47	34.23	15.63	18.64	81.37
SBI Technology Opportunities Fund	198.26	27.44	18.12	21.11	3,683.17
Tata Digital India Fund	49.40	37.91	19.24	21.29	9,710.96

Data Source: AMFI India

In the table above, we have selected a cross section of funds that closely match an innovation fund, although we cannot say that these closely represent the Bandhan Innovation Fund. These comparisons are purely for the purpose of understanding only. We have considered a total of 8 funds with such innovation fund characteristics. Here are highlights of the performance of these funds across time frames.

• The return dispersion is quite high and that is largely because this is a fairly fluid combination of sectors and market caps and are built around a theme, which itself is a theme that is still emerging. On a 1-year returns basis, proxies for innovation funds in India generated maximum returns of 55.68% and minimum returns of 27.44%, showing substantial variation due to the flexible nature of the definition of innovation theme. The average returns over a 1 year period are 39.86%, which is fairly impressive. However, it must be noted here that in a theme like innovation, 1-year returns are only for academic purpose and do not have much practical value.
• Based on 3-year CAGR returns, the open-ended proxies for innovation funds in India generated maximum returns of 34.23% and minimum returns of 15.48%, showing a fairly high variation on a 3-year time frame too. The average returns CAGR over a 3-year period were 22.07%, but here the returns have less impact as an average number due to the wide variations in the portfolio mix and the performance of the innovation proxies.
• Based on returns since launch, the proxies for innovation funds in India generated maximum returns of 41.99% and minimum returns of 15.66%, showing fairly attractive base case returns. The average returns since launch were 23.15%. While these are proxies and not representative of the theme in totality, the 3-year returns and returns since inception are fairly attractive, making it a compelling theme.

We must keep in mind that these are proxies for innovation funds and not really representative of any sectoral or thematic trends. It is more about getting a rough idea of the returns and variation risk in such proxy funds.

GLANCE AT THE BANDHAN INNOVATION FUND NFO

Here are some details of the Bandhan Innovation Fund NFO you must know to decide on investing in the fund.

• The NFO of Bandhan Innovation Fund opens for subscription on April 10, 2024 and will close on April 24, 2024. Being an open-ended equity scheme, the fund will offer buy and sale at NAV linked prices. While the fund has no lock-in period, it is best to hold such flexi cap funds for a period of 5-7 year or more to get full innovation cycle benefits.
• On the Standard SEBI Risk-O-Meter, the Bandhan Innovation Fund will be ranked as a Very High Risk Fund. The high risk is due to the predominant exposure to equities that the Bandhan Innovation Fund will have. In addition, there is the additional risk of entering with NFO funds when the market is at all-time highs. Also, being an active fund there is also the discretion risk of fund managers bias creeping in.
• The Bandhan Innovation Fund is about long term capital appreciation with the theme of innovation to coincide with India becoming the innovation hub of the world. The Bandhan Innovation Fund bets that innovation will be coincidental with the growth of the Indian economy in the coming years, as India transforms to a $5 Trillion economy.
• Investors can invest in the NFO of Bandhan Innovation Fund in minimum size of ₹1,000 and in multiples of ₹1 thereof. This also applies to switch-ins during the NFO and additional purchases. Exit loads will be charge at 0.5% of the redemption amount if redeemed or switched out within 30 days of allotment. Beyond 30 days, there is no exit load. For SIP investments, the minimum requirement is 6 instalments of ₹100 each.
• The Bandhan Innovation Fund does not give any guarantee on returns, being a pure equity fund. The fund can maintain a small portion of funds in debt, but has full flexibility in toggling the portfolio mix between large caps, mid-caps, and small caps. While there is no exit load beyond 30 days, investors are advised to hold on to the fund for minimum of 5-7 yeas to get full benefit of the innovation cycle.
• The Bandhan Innovation Fund NFO will offer the growth option as well as the IDCW (income distribution capital withdrawal) payout option. It will offer the facility to invest via the Regular Plan or through the Direct plan. The NAVs on redemption will be different for regular plans and dividend plans based on the TER imputed to the fund. The NAVs of growth plan and IDCW plan will differ to the extent of dividends declared.
• The fund is best suited for investors with a higher risk appetite and the ability to stay invested for a longer period of 5-7 Investors in the Bandhan Innovation Fund NFO must be prepared for the additional risk of fund manager discretion in allocation across several emerging themes that have not exactly been back-tested in India.
• The Bandhan Innovation Fund will be benchmarked to the Nifty 500 TRI index. The TRI (total returns index) is more reflective as it includes the impact of dividends and capital movement. This benchmarking is used to evaluate whether the fund is underperforming or outperforming the underlying benchmark. The fund managers for the Bandhan Innovation Fund will be Manish Gunwani, Brijesh Shah, and Ritika Behera.
• The Bandhan Innovation Fund NFO will allocate its corpus predominantly to equities while a small portion may be allocated between debt and liquid assets. With equity exposure decisively above 65%, it will be classified as an equity fund for tax purposes. The short term capital gains (held for less 1 year) will be taxed at 15% while long term capital gains (held for over 1 year), will be taxed at a flat rate of 10% beyond a minimum threshold exemption of ₹1 Lakh per financial year.

The Bandhan Innovation Fund NFO is an opportunity for investors to participate in companies that are on the cutting edge of innovation; that is likely to ensure non-linear growth in fundamental performance and market value over the years.