| Type |
Close-ended equity (Diversified)
|
Benchmark |
BSE Sensex
|
| Min. Investment |
Rs 5,000 |
Face Value |
Rs 10 |
| Entry Load |
Nil |
Exit Load |
Nil* |
| Issue Opens |
September 7, 2006 |
Issue Closes |
October 11, 2006 |
| * In case of redemptions during the 5-Yr period from the date of allotment, charge equivalent to unamortised NFO expenses will be recovered. |
The objective of the scheme is to achieve long term capital appreciation by investing predominantly in a diversified portfolio of equity and equity related instruments.
*Source: Offer Document
| |
UTI-Wealth Builder Fund (UTI-WBF) is a close-ended diversified equity fund with a 5-Yr lock-in; subsequently it will be converted into an open-ended fund. The fund proposes to achieve long-term capital appreciation by investing in equities and equity-linked instruments across market capitalisations and sectors.
The fund also proposes to use derivative instruments to hedge its equity portfolio against short-term volatility in equity markets. The hedging could involve complete portfolio hedging or hedging of individual stocks depending upon the fund manager's perception of stock market valuations.
The portion of the equity portfolio to be hedged will be determined by the index (BSE Sensex) levels. The fund house has indicated the index levels (ranging from below 7,000 to above 15,000 points) and the commensurate percentage of equity portfolio to be hedged.
| BSE Sensex |
Portfolio hedged as %
of equity portfolio |
| Below 7,000 |
Upto 10% |
| 7,001-9,000 |
Upto 30% |
| 9,001-11,000 |
Upto 50% |
| 11,001-15,000 |
Upto 70% |
| Above 15,000 |
Upto 90% |
By hedging the equity portfolio and linking it to the index levels, UTI-WBF aims to keep volatility at bay. But there is also a potential negative side to this strategy. As the extent of hedging increases with the rise in index levels, it actually restricts the possibility of garnering higher returns. Thus at current index level, if 70% of the equity portfolio were to be hedged, only 30% of the equity portfolio which is unhedged and exposed to market movements, will be equipped to generate market-linked returns for the fund. Although the hedged position could also clock a return, it will be much lower than the unhedged position. We have learnt from our interactions with the fund house that the decision to hedge the equity portfolio will be made based on the fund manager's perception of the markets.
Barring the strategy of using derivatives in a close-ended fund, UTI-WBF has nothing new on offer. The proposition of a close-ended fund investing in stocks across market segments and sectors has been done to death in recent times. Also, the performance of diversified equity funds from UTI Mutual Fund hasn't exactly been awe-inspiring. In light of the same, we believe investors should give UTI-WBF a miss.
|
UTI-WBF is mandated to invest between 65%-100% of its assets in equities and equity-related instruments. The fund can hold upto 35% of its assets in debt and money market instruments.
| Investments |
Allocation Range |
| Equity & equity related instruments |
65%-100% |
| Debt and money market instruments |
0%-35% |
As mentioned earlier, the fund will use derivatives to hedge the equity portfolio; the extent of hedging will be determined by the index levels.
The extent of hedging will be reset on a half-yearly basis, taking into account the movement of the Sensex over the previous period. UTI-WBF's offer document mentions "hedging would also include stocks that are not owned by the fund but are available under derivative (Futures & Options) segment in the market for trading from time to time as permitted by the regulations". In our view, taking positions in derivative instruments, which are not owned by the fund, amounts to speculation and not hedging. The same could translate into a high risk-high return investment strategy.
|
Mr. Amandeep Singh Chopra, is the Senior Vice President and Head of Fixed Income at UTI Mutual Fund. Mr. Chopra is a science graduate and an MBA. He has been associated with UTI since May 1994 and helped establish the Equity Research Cell. He moved into the area of fund management in 1998.
Mr. Harsha Upadhyaya is the Vice President and Senior Research Analyst at UTI Mutual Fund. He is a B.E. Mechanical from REC, Suratkal and a post graduate in management from IIM, Lucknow. Mr. Upadhyaya also holds a CFA charter conferred by the CFA Institute USA. He has worked with Reliance Industries and Reliance Energy among other companies, prior to joining UTI Mutual Fund in April 2006.
|
Equities as an asset class are best equipped to deliver over longer time frames (at least 3 years). Also a close-ended fund permits the fund manager to make long-term investment decisions and be indifferent to short-term market events, that could have forced the hand of the fund manager managing an open-ended fund. UTI-WBF could well benefit from its close-ended nature and 5-Yr investment tenure.
However it should be noted that the fund's proposed strategy of hedging its equity portfolio is a double-edged sword - while this can shield it from market volatility, it can also cap the returns that it could otherwise have clocked. Also, the use of derivative instruments for speculative purposes could translate into a high risk - high return investment strategy for the fund.
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