The prime object behind investing in any stocks is to gain profits by lowering risks and maximising returns.
UTU Mutual Fund has come up with a new scheme known as UTI Nifty 200 momentum. The new fund offer opened on February 18,2021. (The fund closure date was 4th March,2021.) It is important to know the word momentum which means that an investor buys stocks expecting that if prices of a certain stocks rose, they shall keep rising in near future. An investor has two strategies to follow. One is growth and the other is value investing.
Though there is no guarantee that the investment objective of the scheme will be achieved, it aims at providing returns that, before expenses, closely correspond to the total returns of the securities as represented by the underlying index subject to tracking error. Momentum strategy is globally accepted and this one is going to be one of the firsts under the Index Fund route in India.
Who should consider it?: Investors that prefer low-cost fund based on quantitative strategies could get tempted to consider this scheme. But financial advisors and planners advise the first timers to avoid this UTI Nifty momentum. Momentum is aggressive and carries higher risk and the fund could underperform due to sharp recovery or drop in market cycles. There is a 5% cap on individual stock weight, and there is no sectoral cap. It might lessen the risk which is being passively managed but still not recommended for freshers. The experienced and stable investors can understand it better and be patient enough to see it pass through all ups and downs. Investors with diversified portfolio and adequate funds may consider by investing a smaller amount in this scheme.
- Merits
- Over the past 5 years, the Nifty 200 Momentum 30 TRI gave a 22.44 percent returns. Nifty 50 TRI and Nifty200 TRI gave 17.9% and 17.67% return respectively. Nifty 200 index has underperformed only three out of sixteen calendar years in this strategy.
- This is a rule-based diversified portfolio of momentum stocks so it could be a good option for those who do not want to chase individual shares that are rising.
- There is no fund manager risk because of it being a passively manged fund. Yet it helps to construct a portfolio that systematically adds relatively performing stocks and removes non-performing ones.
- The expense ratio is lower than on an actively managed equity managed scheme.
- The exposure to each stock is derived from the momentum score and free float market capitalization, the exposure to each stock is capped at lower of 5 percent of five times the weight of stock in the index.
- The index is rebalanced twice a year.
- Impact costs are curtailed and brings in efficient price discovery.
- Only those stocks are selected which are present in the Nifty 200 and traded in derivatives market.
- Stocks are selected based on their momentum score, which is determined based on its 6 to 12 month’s price returns after adjusting for its daily price volatility.
Demerits
- The Nifty 200 index stocks are picked so there is no scope for any small cap stocks.
- There is always a period of underperformance. It is sometimes difficult to catch the new picks and results in delayed returns. But this ‘single strategy’ is a feature of momentum investing.
- Certain stocks may go out of favour taking more time to adjust the portfolio.
- The fund strategies might be fruitful only in the long run and carry higher risk making them equivalent to a midcap fund. It is a portfolio that aims to capture 6-12 months to give returns.
Smrutirekha Bhoi