An open-ended scheme investing in equity, arbitrage and debt.

What Is the Investment Objective of the Scheme?*

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The investment objective of the Scheme is to provide capital appreciation and income distribution to the investors using arbitrage opportunities, investment in equity/equity related instruments and debt/money market instruments.

However, there is no assurance or guarantee that the investment objective of the Scheme would be achieved.

*Source: Scheme Information Document

(Read: What You Should Read In A Scheme Information Document)

Is UTI Equity Savings Fund for you?

Equity Savings Fund as categorised by the market regulator, SEBI, is a Hybrid Fund. Meaning, it invests in equity and equity related instruments (including derivatives), debt & money market instruments, and would explore arbitrage opportunities. If there are no arbitrage opportunities available, the scheme has the flexibility to invest in debt. 

UTI Equity Savings Fund (UESF) is one such hybrid scheme from the stable of UTI Mutual Fund. It is a new and unique addition to the product basket of the fund house.

Under normal circumstances, UESF will invest 65-90% of its assets in equity & equity related securities (including cash future arbitrage and net long equity position), and the remaining 10-35% in debt & money market instruments (including securitised debt).

However, if the fund manager is of the view that the economic or market conditions may be become unfavourable for investors in equities, then as a defensive strategy, he may invest a higher proportion of the fund’s assets in short-term and medium-term fixed income instruments as well as near cash equivalents. The fund manager may also adopt this strategy while zeroing on investment opportunities or to maintain liquidity.

In addition, UESF has an enabling provision to invest upto 10% in units issued by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trust (InvITs).

From a risk standpoint, given that UESF portfolio will typically have a dominant exposure to equity and equity related instruments—including unhedged equities, the scheme is suitable only if you have a moderately high-risk appetite and have an investment time horizon of at least 5 years.

From a tax implication standpoint, since Equity Savings Funds invest a dominant portion of the net assets in equities, they are categorised as equity-oriented mutual fund scheme. If redeemed within a holding period of one year, Equity Savings Funds will attract a Short Term Capital Gain Tax (STCG) tax of 15%. And if redeemed after a period of 1 year, the Long Term Capital Gains (LTCG) in excess of Rs 1 lakh will be taxed @10%.

How will UTI Equity Savings Fund allocate its assets?

The asset allocation of UTI Equity Savings Fund would be generally invested consistent with the objective of the scheme in the following manner:

Instruments	Normal  Allocation (% of net assets)		Risk Profile High/Medium/Low
	Minimum	Maximum
Equity and Equity related securities	65%	90%	Medium to High
Cash Future Arbitrage Opportunities	20%	75%	Low to Medium
Net Long Equity Position	20%	50%	Medium to High
Debt & Money Market Instruments including cash & cash equivalent^	10%	35%	Low to Medium
Units issued by REITs & InvITs	0%	10%	Medium to High

*The fund may invest up to 50% of its debt portfolio in securitized debt

Further, it is stated in the offer document that:

• The Scheme may invest in Repo in corporate debt. Gross exposure of the scheme to repo transactions in corporate debt securities shall not be more than 10% of the net asset scheme or such other limits as may be permitted by SEBI from time to time.

• The Scheme can take exposure up to 20% of its net assets in securities lending.

• The Scheme will not engage in short-selling.

• The Scheme shall not engage in Credit Default Swap.

• Investment in equities would be through primary as well as secondary market.

• The margin money deployed on these positions (both equity and/or debt derivatives) would be included in Money Market category.

• The Fund may use derivative instruments like Stock/Index Futures, Interest Rate Swaps, Interest Rate futures and Forward Rate Agreements or such other derivative instruments as may be introduced from time to time for the purpose of hedging and portfolio balancing, or to undertake any other strategy within a limit of 75% of the Net Assets of the scheme. Total investments in debt, equity, money market instruments, units of mutual fund scheme, derivatives and hybrid instruments shall not exceed 100% of the net assets of the Scheme.

• The Scheme may seek investment opportunity in the ADR/GDR/Foreign Securities, in accordance with guidelines stipulated in this regard by SEBI and RBI from time to time. Under normal circumstances, the scheme shall not have an exposure of more than 10% of its net assets in ADR/GDR/foreign securities subject to regulatory limits

(Source: Scheme Information Document)

What will be the investment strategy followed by UTI Equity Savings Fund?

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UESF proposes to invest into equity and equity related instruments across market capitalization and follow a blend of growth and value based approach.

To construct its equity portfolio UESF will follow a combination of bottom-up and top-down approach with emphasis on the microeconomic factor of the underlying business. The companies will be evaluated on the basis of though not limited to cash flow generation, Return on Capital Employed (RoCE) / Return on Equity (RoE) and sound management track record.

But there will a risk of mispricing or improper valuation and the inability of derivatives to correlate perfectly with underlying assets, rates and indices.

Further, UESF is expected to have a high portfolio churn, especially in a volatile market. It is difficult to estimate with any reasonable measure of accuracy, the likely turnover in the portfolio. However, the fund house endeavours to balance the increased cost on account of higher portfolio turnover with the benefits derived therefrom.

UESF will also carry out arbitrage strategies, which would entail taking offsetting positions in the various markets simultaneously. The market provides opportunities to the investor to derive returns from the implied cost-of -carry between the underlying cash market and the derivatives market. This provides for opportunities to generate returns that are possibly higher than short-term interest rates with minimal active price risk on equities. Implied cost-of-carry and spreads across the spot, futures and options markets can potentially lead to profitable arbitrage opportunities.

However, there is no guarantee that the fund manager will be able to spot such arbitrage opportunities. So, there is an execution risk while implementing arbitrage strategies.

As regards debt & money market instruments, UESF will manage duration dynamically by investing across maturities of corporate bonds, G-Secs, and money market instruments. Therefore, the fund manager will have the flexibility to invest in the short-end or long-end of the curve based on investment environment and market outlook. UESF would consider liquidity, interest rate policy announced by RBI, shifts in the yield curve, credit rating changes among a host of other factors while managing the debt portion.

Who will manage UTI Equity Savings Fund?

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The equity portion will be managed by Mr V. Srivatsa, the debt portion by Sunil Patil, and the overseas investment by Mr Kamal Gada.

Mr V. Srivatsa is the Executive Vice President and Fund Manager. He has been with UTI AMC since 2002. Prior to joining UTI in 2002, he has worked with Ford, Rhodes Parks & Co., Chartered Accountants for 3 years, and as Officer-Audit in Madras Cements Ltd.

Mr Srivatsa is a commerce graduate (B.Com), a Chartered Account (CA), Cost & Works Accountant (CWA), and holds a PGDM from IIM, Indore.

Currently, at UTI Mutual Fund he manages UTI Core Equity Fund (erstwhile UTI Top 100 Fund), UTI Hybrid Equity Fund (erstwhile UTI Balanced fund), UTI Retirement Benefit Pension Fund (equity portion), UTI Capital Protection Oriented Schemes (equity portion), UTI-Dual Advantage Fixed Term Funds (equity portfolio), UTI Healthcare Fund (erstwhile UTI-Pharma & Healthcare Fund) along with Mr Ritesh Rathod, and a few offshore funds.

However, not all equity scheme managed by Srivatsa have adequately compensated investors for the risk taken. Some aren’t among the top performers, and many haven’t completed a three-year track record necessary to evaluate equity mutual funds.

Mr Sunil Patil, too, is the Executive Vice President at UTI Mutual Fund. He joined UTI Mutual Fund in October 1989 and has an overall experience of 29 years in Primary Market Investment / Dealing and Fund Management.

Mr Patil is a Post-graduate in Commerce (M.Com), holds a Master Degree in Finacial Management (MFM) from Narsee Monjee Institute of Management Studies, and a CAIIB-I Certification.
Currently, at UTI Mutual Fund he manages UTI-Fixed Term Income Funds, UTI-Fixed Income Interval Fund Series I & II, UTI-Capital Protection Oriented Schemes (debt portion), UTI-Dual Advantage Fixed Term Funds (debt portion), UTI Hybrid Equity Fund (debt portion), and Fixed Maturity Plans (FMPs).

Most of the debt scheme managed by Mr Patil have fared well —adequately compensated the investors.

Mr Kamal Gada, who will manage the overseas portion of UESF, holds nearly 13 years of total work experience, of which 9 years with UTI Mutual Fund. Mr Gada has a bachelors’ degree in Commerce (B.Com), is a Chartered Accountant (CA), Company Secretary (CS), and a CFA charter holder.

Fund Outlook for UTI Equity Savings Fund

The launch of UTI Equity Savings Fund comes at a time when the Indian equity market has scaled to a new lifetime high.

Correspondingly also a time when the Indian rupee has hit a new low ––below 70 against the US dollar, oil prices are heated, inflation is trending up, and there’s pressure on India’s current account deficit and fiscal deficit. Moreover, we are a few months away from 2019 Lok Sabha elections.

The RBI in the wake of rising inflation has gone on with two successive rate hikes, making borrowing dearer. And although the stance of the monetary policy has been kept neutral, successively rate also means that the RBI is going aggressively to counter inflation and achieve the inflation target of 4%.  Corporate earnings for some counters are encouraging, but it is mainly on account low base effect and margins have been flat on account of increase in input costs.

Such a scenario appears challenging for portfolio construction, particularly when the margin of safety appears to have narrowed. The 10-year benchmark yield is also hovering near 8.0%. The longer end of the yield curve could prove risky in the near-term.

Nevertheless, the mandate of the fund could come as precaution provided the fund manager uses it thoughtfully to construct the investment portfolio, both equity (including derivatives) and debt, plus even while exploring arbitrage opportunities.

The fortune of UTI Equity Savings Fund will be closely linked to how the fund managers play their strategy while building the portfolio.

To read PersonalFN’s view, click here.

[Read: Skip NFOs, Instead Consider Building A Strategic Mutual Fund Portfolio]

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