UTI Mutual Fund Launches Two New Schemes: Should You Invest?

In the calendar year 2024, UTI Mutual Fund -- one of the country's top 10 fund houses by Average Assets Under Management (AAUM) -- has launched quite a few Exchange Traded Funds (ETFs) and Index Funds. It appears that the fund house is consciously building its product portfolio with passively managed funds.

This is perhaps recognising the interest of investors in passively managed funds and the fact quite a sizeable number of actively managed equity funds (even the Mid Cap Funds and Small Cap Funds) have failed to beat their benchmark, i.e. generate alpha.

So, UTI Mutual Fund capitalising on the cult of equity investing in India is offering products that could appeal to investors.

Currently, the fund house has launched two Index Funds:

Let's understand each of these Schemes in detail.

UTI Nifty Alpha Low-Volatility 30 Index Fund

This is an open-ended scheme replicating/ tracking the Nifty Alpha Low-Volatility 30 Total Return Index (TRI). In other words, the returns would commensurate with the performance of the Nifty Alpha Low-Volatility 30 Index over the long term, subject to tracking error.

Under normal circumstances, 95% to 100% of the net assets of the Scheme will be invested in equity and equity-related securities of companies constituting the Nifty Alpha Low-Volatility 30 Index.

The net assets of the scheme will be invested in stocks constituting the underlying index. This would be done by investing in the stocks comprising the index.

For hedging purposes, the Scheme may take exposure of 20% of its net assets in derivatives. The Scheme's exposure to equity derivatives of constituents of the underlying index would be for a short duration when securities of the index are unavailable, insufficient or for rebalancing at the time of change in the index or in case of corporate actions or for hedging purposes, as permitted subject to rebalancing within 7 days or as specified by SEBI from time to time.

The Scheme also intends to engage in stock lending, but not more than 20% of the net assets can generally be deployed in stock lending and not more than 5% of the net assets can generally be deployed in stock lending to any single approved intermediary/counterparty.

Up to 5% of the net asset of the Scheme would be invested in Debt/Money Market instruments including Triparty Repo on Government Securities or treasury bills and units of Liquid Mutual Fund.

The Scheme may invest up to 5% of its net assets in mutual funds that are managed by UTI AMC in schemes under the management of any other asset management company.

The pending deployment of funds of the Scheme may be invested in short-term deposits of scheduled commercial banks, as per the regulatory guidelines.

Being an Equity Index Fund, the Scheme does not intend to invest in Structured Obligations (Sos) and Credit Enhancements (CEs), debt Instruments with Special Features (AT1 and AT2 Bonds), commodity derivatives, repo in Corporate Debt, debt derivatives instrument and REIT & InVIT Instruments.

Further, the scheme will not invest in ADRs/GDRs/Foreign Securities/Securitized Debt/Credit Default Swaps/Short selling.

As regards the tracking error, it would be monitored on an ongoing basis and would seek to minimize tracking error to the maximum extent possible.

The tracking error i.e. the annualized standard deviation of the difference in daily returns between the underlying index or goods and the NAV of the scheme based on past one-year rolling data shall not exceed 2%.

In case of unavoidable circumstances like force majeure, which are beyond the control of the AMCs, the tracking error may exceed 2% and the same shall be brought to the notice of Trustees with corrective actions taken by the AMC, if any.

For an Index Fund in existence for a period of less than one year, the annualized standard deviation shall be calculated based on available data. The scheme shall disclose the tracking error based on the past one year rolling data, on a daily basis, on the website of AMC and the Association of Mutual Funds in India (AMFI).

What is the Investment Objective of UTI Nifty Alpha Low-Volatility 30 Index Fund?

The Investment objective of the Scheme is to provide returns that, before expenses, corresponds to the total return of the securities as represented by the underlying index, subject to tracking error.

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

What Investment Strategy the UTI Nifty Alpha Low-Volatility 30 Index Fund Will Follow?

The Scheme is a low-cost index Fund which tracks the Nifty Alpha Low-Volatility 30 Index and thus will be managed passively with investments in stocks comprising the Underlying Index subject to tracking error.

Since the Scheme is an index fund, it will only invest in securities constituting the Underlying Index.

The investment strategy would revolve around reducing the tracking error to the least possible through regular rebalancing of the portfolio, taking into account the change in weights of stocks in the Index as well as the incremental collections/redemptions in the Scheme.

As part of the Fund Management process, the Scheme may use derivative instruments such as index futures and options, or any other derivative instruments that are permissible or may be permissible in future under applicable regulations. The Scheme intends to use derivatives for the purpose of hedging and portfolio balancing.

A part of the funds may be invested in debt and money market instruments, to meet liquidity requirements.

The Scheme endeavours to achieve a return equivalent to the underlying index while minimizing tracking error.

Thus, the performance of the Scheme will be benchmarked against the Nifty Alpha Low-Volatility 30 TRI as the scheme tracks the Nifty Alpha Low-Volatility 30 Index passively.

About the Nifty Alpha Low-Volatility 30 Index

This Index (launched on July 10, 2017, with a base date of April 1, 2005) is designed to reflect the performance of a portfolio of stocks selected based on the top combination of Alpha and Low Volatility.

It intends to counter the cyclicality of a single-factor index strategy and provides investors with a choice to take exposure to multiple factors through a single index product. The Index consists of 30 stocks selected from Nifty 100 and Nifty Midcap 50.

The weights of the stocks are derived from Alpha and Low Volatility factor scores with individual stock weights capped at 5%.

The Nifty Alpha Low Volatility 30 Index has exposure to sectors such as healthcare, auto & auto components, FMCG, financial services, construction, capital goods, and oil & gas, among others.

Since the base date of April 1, 2005, the Nifty Alpha Low Volatility 30 Index has clocked a price return of 18.6% CAGR and a total return (which includes dividends) of 20.2% (as of October 31, 2024).

In the last 5 years, the Nifty Alpha Low Volatility 30 Index created wealth for an appealing pace with a price return of 18.5% CAGR and a total return of 19.9% CAGR (as of October 31, 2024).

Since the lows of the COVID-19 pandemic, Nifty Alpha Low Volatility 30 Index has nearly tripled investors' wealth.

How Who Should Consider UTI Nifty Alpha Low-Volatility 30 Index Fund?

While the historical returns seem enticing, note that currently the trail P/E of the Nifty Alpha Low Volatility 30 Index is 27x, which cannot be construed as reasonable.

While the UTI Nifty Alpha Low-Volatility 30 Index Fund is expected to commensurate with the performance of the Nifty Alpha Low-Volatility 30 Index over the long term, subject to tracking error, it would be imprudent to expect very low volatility given that geopolitical scenarihttps://www.personalfn.com/document/UTI-Nifty-Alpha-Low-Volatility-30-Index-Fund-KIM.pdfo and macroeconomic scenario would weigh on the Indian equity market.

[Read: How Donald Trump's Victory Would Playout On the Indian Equity Market]

This Scheme, therefore, is for investors who have a very high-risk appetite and an investment horizon of around 6 to 7 years.

To learn more about the UTI Nifty Alpha Low - Volatility 30 Index Fund, read the Scheme Information Document and Key Information Memorandum.

UTI Nifty Midcap 150 Index Fund

This is an open-ended equity scheme replicating/tracking the Nifty Midcap 150 Total Return Index (TRI). In other words, the returns would commensurate with the performance of the Nifty Midcap, subject to tracking error.

Under normal circumstances, 95% to 100% of the net assets of the Scheme will be invested in equity and equity-related securities of companies constituting the Nifty Midcap 150 Index.

The net assets of the scheme will be invested in stocks constituting the underlying index. This would be done by investing in the stocks comprising the index.

The Scheme may also take exposure to equity derivatives of constituents of the underlying index for a short duration when securities of the index are unavailable, insufficient or for rebalancing at the time of change in the index or in case of corporate actions or for hedging purposes, as permitted subject to rebalancing within 7 days or as specified by SEBI from time to time. The exposure of the Scheme in derivative instruments shall be up to 20% of the net assets of the Scheme.

The Scheme may also engage in securities lending not exceeding 20% of the net assets of the Scheme, and not more than 5% of the net assets of a Scheme can generally be deployed in Stock Lending to any single approved intermediary/counterparty.

Up to 5% of the net asset of the Scheme would be invested in Debt/Money Market instruments including Triparty Repo on Government Securities or treasury bills and units of Liquid Mutual Fund.

The scheme may invest up to 5% of its net assets in mutual fund units that are managed by UTI AMC in schemes under the management of any other asset management company.

The pending deployment of funds of the Scheme may be invested in short-term deposits of scheduled commercial banks, as per the regulatory guidelines.

Being an equity Index Fund, the Scheme does not intend to invest in Structured Obligations (Sos) and Credit Enhancements (CEs), debt instruments with Special Features (AT1 and AT2 Bonds), Commodity Derivatives, Repo in Corporate Debt, Debt Derivatives instrument and REIT & InVIT Instruments.

Moreover, the Scheme will not invest in ADRs/GDRs/Foreign Securities/Securitized Debt/Credit Default Swaps/Short selling.

As regards the tracking error, it would be monitored on an ongoing basis and would seek to minimize tracking error to the maximum extent possible.

The tracking error i.e. the annualized standard deviation of the difference in daily returns between the underlying index or goods and the NAV of the scheme based on past one-year rolling data shall not exceed 2%.

In case of unavoidable circumstances like force majeure, which are beyond the control of the AMCs, the tracking error may exceed 2% and the same shall be brought to the notice of Trustees with corrective actions taken by the AMC, if any.

For an Index Fund in existence for a period of less than one year, the annualized standard deviation shall be calculated based on available data. The scheme shall disclose the tracking error based on the past one year rolling data, on a daily basis, on the website of AMC and the Association of Mutual Funds in India (AMFI).

What is the Investment Objective of the UTI Nifty Midcap 150 Index Fund?

The Investment objective of the Scheme is to provide returns that, before expenses, corresponds to the total return of the securities as represented by the underlying index, subject to tracking error.

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

What Investment Strategy the UTI Nifty Midcap 150 Index Fund Will Follow?

To achieve its investment objective, the UTI Nifty Midcap 150 Index Fund will follow a passive investment style, as it is a low-cost index Fund which tracks the Nifty Midcap 150 Index.

Investments will be in stocks comprising the underlying index (i.e. the Nifty Midcap 150 Index) subject to tracking error.

The investment strategy would revolve around reducing the tracking error to the least possible through regular rebalancing of the portfolio, taking into account the change in weights of stocks in the Index as well as the incremental collections/redemptions in the Scheme.

As part of the fund management process, the Scheme may use derivative instruments such as index futures and options, or any other derivative instruments that are permissible or may be permissible in future under applicable regulations. The Scheme intends to use derivatives for the purpose of hedging and portfolio balancing.

A part of the funds may be invested in debt and money market instruments, to meet liquidity requirements. Since the Scheme is an index fund, it will only invest in securities constituting the underlying index.

The Scheme endeavours to achieve a return equivalent to the underlying index while minimizing tracking error.

The performance of the Scheme will be benchmarked against Nifty Midcap 150 TRI as the scheme tracks the Nifty Midcap 150 Index passively.

About the Nifty Midcap 150 Index

The Nifty Midcap 150 Index (launched on April 1, 2016, with a base date of April 1, 2005) represents 150 companies (companies ranked 101-250) based on full market capitalisation from the Nifty 500.

The Nifty Midcap 150 Index is computed using the free-float market capitalization method, wherein the level of the index reflects the total free-float market value of all the stocks in the index relative to a particular base market capitalisation value.

The Nifty Midcap 150 Index has representation to sectors such as financial services, capital goods, healthcare, auto & auto components, IT, and chemicals among others. At present, it has the highest representation to the financial services sector and the least in media, entertainment & publication.

Since the base date of April 1, 2005, the Nifty Midcap 150 Index has clocked a price return of 16.8% CAGR and a total return (which includes dividends) of 18.2% (as of October 31, 2024).

In the last 5 years, the Nifty Midcap 150 Index created wealth for investors at a stellar pace delivering a price return of 27.5% CAGR and a total return of 28.5% CAGR (as of October 31, 2024).

Since the lows of the COVID-19 pandemic, Nifty Midcap 150 Index has multiplied investors' wealth by over 4 times.

To learn more about the UTI Nifty Midcap 150 Index Fund, read the Scheme Information Document and Key Information Memorandum.

How Who Should Consider UTI Nifty Midcap 150 Index Fund?

Aggressive investors who have the stomach for very high risk associated with mid caps, wish to earn returns that are commensurate with the performance of the Nifty Midcap 150 Index over the long term, (subject to tracking error), and have an investment horizon of 7 to 8 years may consider the UTI Nifty Midcap 150 Index Fund.

Keep in mind that midcap stocks of the Indian equity market are trading at lofty valuations, much higher than the large caps. Even though the Indian equity has corrected since the lifetime high, it is not greater than 10% from the peak and valuations still are expensive.

Currently, the trail PE of the Nifty Midcap 150 Index is at nearly 43x - which is surely not reasonable. The Nifty Midcap 150 Index stocks are trading over 5x their book value, which again is not very comforting.

Indian equities, by and large, are commanding a premium compared to global peers.

Now while some may justify the premium that Indian equities command relative to global peers as India is the fastest-growing major economy (at the fifth spot), in my view, given the market risk involved due to geopolitical and economic uncertainty, it is not a very conducive environment to make fresh invest in mid caps (and small caps) even if you have a very high-risk appetite.

It would be wise to avoid getting swayed by irrational exuberance.

Who Will Manage These Schemes?

Both, UTI Nifty Midcap 150 Index Fund and UTI Nifty Alpha Low-Volatility 30 Index Fund will be managed by Mr. Sharwan Kumar Goyal, as a dedicated fund manager. Mr. Ayush Jain will be the Assistant Fund Manager.

Shrawan began his career with UTI AMC in June 2006 and has 18 years of overall experience in Risk & Fund management. He is a commerce graduate (B.Com), holds a Masters in Management Studies (MMS), and is a Chartered Financial Analyst (CFA).

At present, he heads passive, arbitrage & quant strategies at UTI AMC. He manages several ETFs and Index Funds at the fund house.

Ayush who is designated as an Assistant Fund Manager is a Chartered Accountant (CA) holding a charter from the Institute of Chartered Accountants of India (ICAI) and is a commerce graduate (B.Com).

He began his career with UTI AMC Ltd in April 2018 and has over 6 years of experience in Equity Fund Management, Equity Research, Equity Portfolio Analysis and Portfolio Management Services (PMS). He assists Shrawan in managing several ETFs and Index Funds at the fund house.

Minimum Investment, Plans and Options Available

For both the aforesaid New Fund Offers (NFOs), the minimum initial amount of investment during NFO and on an ongoing basis is Rs 1,000/- and in multiples of Re.1/- thereafter.

The subsequent minimum investment amount under a folio is also Rs 1,000/- and in multiples of Re.1/- thereafter with no upper limit.

In the case of the Systematic Investment Plan (SIP), for daily, weekly and monthly SIP the minimum SIP amount is Rs 500/- and in multiples of Re.1/- thereafter.

The minimum SIP amount for Quarterly SIP is Rs 1,500/- and in multiples of Re 1/- thereafter.

The Schemes offer both a Regular Plan and a Direct Plan to invest and only the Growth Option.

UTI Mutual Fund as a fund house follows robust investment processes and systems. However, make sure you are investing in schemes that are in congruence with your personal risk profile, broader investment objective, financial goals, and the time in hand to achieve those envisioned goal/s.

Be a thoughtful investor.

Happy Investing!