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UTI Nifty 200 Momentum 30 Index Fund NFO review: Should you invest?

The strategy of investing in stocks based on momentum sounds exciting. But will the fund limit risks and deliver healthy returns?

February 26, 2021 / 11:23 AM IST

Growth and value investing have been two commonly followed strategies by different fund managers. A few others plainly like to ride the momentum in the market, by buying flavour-of-the-season stocks.

Now, UTI Mutual Fund has rolled out a new scheme that is expected to focus on momentum investing. The UTI Nifty 200 Momentum 30 Index Fund (UM30) is open for subscription.

What is it about?

Momentum investing works on the expectation that what has worked in the short term, should continue to deliver over the medium to long term as well. So, such an investor buys stocks that rose in the recent past, with the expectation that prices would continue to head north.

UM30 aims to mimic the Nifty 200 Momentum 30 Index by purchasing stocks in the same weight as they appear in the index. The index constituents are selected based on their normalized momentum score, which is determined using its six-month and 12-month price return, adjusted for daily price volatility.

What works

The Nifty 200 Momentum 30 Index selects only those stocks that are present in the Nifty 200 and also are traded in derivatives market. This cuts the impact costs and ensures efficient price discovery. The index is rebalanced twice a year. Though 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 or five times the weight of stock in the index, based on free float market capitalisation.

Over past five years, the Nifty200 Momentum 30 TRI gave 22.44 percent returns whereas Nifty 50 TRI and Nifty 200 TRI delivered 17.9 percent and 17.67 percent returns, respectively.

Since this is a passively managed fund, there is no fund manager risk and the expense ratio is expected to be lower than that on an actively managed equity scheme.

“If you are very keen to buy shares that are rising, instead of chasing individual stocks, you could look at this rule-based diversified portfolio of momentum stocks,” says Vishal Dhawan, Founder and Chief Financial Planner, Plan Ahead Wealth Advisors.

What doesn't

If a certain set of stocks suddenly goes out of favour, this fund may take some time to adjust the portfolio. There could also be a delay I identifying new picks on the way up. Such delays could lead to periods of underperformance. This is very much common in ‘single strategy’ indices such as momentum investing.

Stocks are picked from the Nifty 200 index, which means that there would be no scope for having small-cap stocks. Investors may miss a few opportunities if the market sees a broad-based rally.

What should you do?

The momentum strategy is aggressive and risky. By being passively-managed, UM30 seeks to curtail risks, but that is easier said than done.

UM30 may not be suitable for first-time investors. Those with an adequately diversified portfolio and with a surplus to spare can consider investing small amounts in the fund.

Amol Joshi, founder of Plan Rupee Investment Services says, “This being an aggressive offering, it should be in the satellite portfolio of investors who understand the risks associated with momentum investing.”

You must have the risk appetite and patience to sit through phases of underperformance.

The new fund offer closes on March 4, 2021.

Nikhil Walavalkar
first published: Feb 26, 2021 11:23 am