Is Union Focused Fund A Worthwhile Bet?
Jul 25, 2019

Author: Aditi Murkute

Is Union Focused Fund A Worthwhile Bet
(Image source: Image by Thomas B. from Pixabay)

Union Mutual Fund launches Union Focused Fund (UFF), an open-ended diversified equity scheme which will follow a focused approach of investing in equity and equity-related instruments.

UFF aims to focus only on a maximum of 30 stocks of companies across market capitalization segments i.e. large-cap, mid-cap, and small-cap. Therefore, in that sense, the fund has the flexibility as it follows a conviction-driven or a focused approach.

As per SEBI regulations, a focused fund is not allowed to hold more than 30 stocks and invest a minimum of 65% of its assets in equity and equity-related instruments, which exactly what UFF is following. But it will also allocate some portion (up to 35% of its total assets) to debt and money market instruments from an asset allocation standpoint and to mitigate the risk.

On the risk-return matrix, UFF owing to its conviction driven or focused approach while investing in equities would be a very high-risk, very high-return investment proposition, although the fund holds the flexibility to invest across market capitalisation segments.

[Read: Why Comparing Returns to Risk Is More Meaningful!]

Image 1: Risk-Return Matrix

Risk-Return Matrix
(Source: Union Focused Fund Product Brochure-Presentation)

So, UFF is suitable for investors with a stomach for very high risk and an investment time horizon of at least 7-8 years while seeking capital appreciation.

Table 1: Details of Union Focused Fund

Type An open-ended equity scheme investing in maximum 30 stocks across market caps (i.e. Multi-Cap). Category Diversified Equity -- Focused Fund
Investment Objective To generate capital appreciation by investing in a portfolio of select equity and equity-linked securities across market caps.

However, there can be no assurance that the investment objective of the scheme will be achieved.
Min. Investment Rs 5,000 and in multiples of Re 1 thereafter Face Value Rs 10 per unit
Plans Regular
Direct
Options
  • Growth*
  • Dividend
    • Re-investment Facility*
    • Pay-out Facility
    • Sweep Facility
*Default option
Entry Load Nil Exit Load 1% if units are redeemed or switched out on or before completion of 1 year from the date of allotment. Nil thereafter.
Fund Manager Mr Vinay Paharia Benchmark Index S&P BSE 500 Index$ (TRI).
Issue Opens July 15, 2019 Issue Closes: July 29, 2019

$Disclaimer: The "Index" viz. "S&P BSE 500 Index", is a product of Asia Index Private Limited (AIPL), which is a joint venture of S&P Dow Jones Indices LLC or its affiliates ("SPDJI") and BSE, and has been licensed for use by Union Asset Management Company Private Limited. Standard & Poor's® and S&P® are registered trademarks of Standard & Poor's Financial Services LLC ("S&P"); BSE® is a registered trademark of BSE Limited ("BSE"); and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones"). © Asia Index Private Limited 2014. All rights reserved. Redistribution, reproduction and/or photocopying in whole or in part are prohibited without written permission of AIPL. For more information on any of AIPL's indices please visit http://www.asiaindex.com/. None of AIPL, BSE, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and none of AIPL, BSE, S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC or their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
(Source : Scheme Information Document)

How will the scheme allocate its assets?

Under normal circumstances, the scheme's asset allocation will be as under:

Table 2: UFF's Asset Allocation

Instruments Indicative allocations (% of net assets) Risk Profile
Minimum Maximum
Equity and Equity related instruments across market caps* 65 100 High
Debt and Money Market Instruments 0 35 Low

*Investment in maximum 30 stocks across market capitalisation.
Investment in Securitized Debt - Nil
Investments in Derivatives - up to 50% of the net assets of the scheme
Investments in Securities Lending - up to 20% of its net assets of the scheme (where not more than 5% of the net assets of the scheme will be deployed in securities lending to any single counterparty).
In accordance with SEBI Circular No. Cir/ IMD/ DF/ 11/ 2010 dated August 18, 2010, the cumulative gross exposure through equity, debt and derivative positions will not exceed 100% of the net assets of the scheme.
The scheme does not intend to invest in overseas/foreign securities or participate in repo/ reverse repo transactions in corporate debt securities or engage in short selling or participate in credit default swap transactions.
(Source : Scheme Information Document)

What will be the Investment Strategy?

The Union Focused Fund seeks to generate long term capital appreciation by investing in maximum 30 stocks across market caps (i.e. Multi-Cap). To manage the assets of the Scheme, the fund manager and his team will follow an active strategy which would be a combination of bottom-up and top-down approach.

[Read: Two Approaches To Portfolio Construction Followed By Fund Managers]

The fund manager's team will scan the market for opportunities and shall evaluate the individual opportunities on their merits, leading to the bottom-up investment decision. For the top-down approach, aspects such as macro-economic factors, industry evaluation, market outlook, sector allocation etc. shall be considered.

The fund manager could use derivatives within the permissible limits for hedging and rebalancing the portfolio or such other purpose as may be permitted under the Regulations from time to time.

Investment in Debt and Money Market Instruments will be as per asset allocation pattern mentioned in this document, subject to the investment limits prescribed under the SEBI (Mutual Funds) Regulations, 1996 and circulars issued thereunder. Investment in debt securities will be guided by credit quality, liquidity, interest rates and their outlook.

Who will manage the Union Focused Fund?

The Union Focused Fund is managed by Mr Vinay Paharia.

Mr Vinay Paharia is a commerce graduate and has done masters in management studies (MMS). He is currently the Chief Investment Officer at the AMC and has over 15 years of work experience in Equity Research and Fund Management.

Before joining Union Mutual Fund, Mr Vinay Paharia was working with Invesco Asset Management (India) Private Ltd. as the Equity Fund Manager for more than a year. Prior to it, he was associated with DBS Cholamandalam AMC, K R Choksey Shares and Securities Pvt Ltd and First Global Stockbroking Pvt Ltd as Equity Research Analyst.

Some of the schemes, that Mr Vinay Paharia manages at the fund house are; Union Multi-Cap Fund (Formerly Union Equity Fund), Union Value Discovery Fund, Union Small Cap Fund, Union Equity Savings Fund, Union Balanced Advantage Fund, Union Capital Protection Oriented Fund - Series 7 and Union Capital Protection Oriented Fund - Series 8.

The outlook for Union Focused Fund:

In order to achieve the investment objective, the fund manager of the Union Focused Fund will invest across market cap using a combination of bottom-up and top-down approach through active management in 30 stocks.

And to select these 30 stocks from across universe having a market cap of more than a defined threshold, a two-step process will be followed. The first step includes a BMV (Business, Management and Valuation) filtering process to select stocks of companies that have reasonable and sustainable growth.

Image 2: BMV filter

BMV filter
(Source: Union Focused Fund Product Brochure-Presentation)

The second step includes stock segmentation process, wherein they are segregated into growth stocks and bargain stocks. It is followed by a focused approach to create a portfolio with an objective to have a high potential return portfolio that will invest across sector and market cap and allocate assets accordingly.

[Read: Growth v/s Value Investing: Which Is Better Of The Two In Current Times?]

Image 3: Stock Segmentation and Portfolio Construction

Stock Segmentation and Portfolio Construction
(Source: Union Focused Fund Product Brochure-Presentation)

However, in the current market environment, to construct a robust portfolio, that could generate higher returns is going to be a difficult task. Despite the current times of volatility, it does offer value buying opportunities in the small-cap and mid-cap segments due to market corrections. Even the large-cap segment witnessed a downfall, but it comprises of large blue-chip companies with strong balance sheets and proven track records.

So, while constructing the portfolio with the aim of diversification, a dominant allocation to large-cap can offer stability to the investment portfolio of the Union Focused Fund and could help ride the wave of short-term volatility to a certain extent.

But amidst the turbulence owing to the macroeconomic headwinds in play, the fortune of the fund would be closely linked to a maximum of 30 stocks held in the portfolio (multi cap) managed by the fund manager to deal with the risk to achieve the stated objective is crucial.

[Read: Best Multi-Cap Funds That Could Prove To Be Wealth Multipliers In 2019!]

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This article first appeared on Certified Financial Guardian.  


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