UTI Nifty500 Value 50 Index Fund: A review

NFO UTI Nifty500 Value50 index fund

Value investing has done well in the volatile environment after the stock markets recorded a low in March 2020. UTI Mutual Fund has launched the new fund offer (NFO) of UTI Nifty500 Value 50 Index Fund (UV50). This is the first broad-based value index fund. Should you invest?

What is on offer?

UV50 aims to provide returns in line with that offered by the underlying index – Nifty 500 Value 50 index. The underlying index comprises 50 stocks that are selected from a universe of stocks present in Nifty500. These stocks are picked based on their value score and free-float market capitalisation. The value score of these stocks is computed giving equal weight to valuation parameters such as earnings yield (reverse of price-to-earnings ratio) , price-to-book ratio, sales-to-price ratio and dividend yield. The weight of each stock is capped at a lower of 5 percent or three times the weight of the stock in the index based only on free market capitalisation. The index is rebalanced twice a year.

What works?

Sharwan Goyal, Fund Manager and Head – Passive, Arbitrage and Quant Strategies, UTI AMC says, “UV50 aims to offer a diversified portfolio of attractively valued companies on the basis of defined valuation parameters, from a broad universe of Nifty 500 stocks.”

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The data-driven approach of UV50 to value investing may have takers at a time when the value funds are doing good. This can be a good investment idea for value investors keen on avoiding fund manager risk. Since it is a passively managed fund, it is expected to be cheaper than actively managed funds. The underlying index has stocks of companies of varying sizes spread across sectors. Index construction based on value score as well as free float market capitalisation should ensure relatively liquid names, which should augur well for the underlying index.

Value investing is all about buying undervalued stocks, which is more possible in mid and smallcap stocks given the relatively less analyst coverage, compared to largecap stocks. This being a broad-based value index fund, exposure to mid and smallcap stocks should work in favour of investors, especially when the broad market is in an upswing.

What does not work?

Value investing deals with buying stocks that are attractively valued in the context of their future growth. UV50 however focuses on data points that capture the past. At a time when there are many actively managed value funds doing good, this fund has limited appeal. According to Value Research, in the five years ended April 26, 2023, value funds on average gave 10.8 percent whereas flexicap funds gave 9.92 percent.

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“Most actively managed value-based equity schemes use relative valuation approach wherein apart from various valuation parameters, fundamental factors are also considered to account for future growth, whereas for a value-based index, the selection of stocks is rule based on defined value parameters, which only focuses on identifying stocks that may generate economic value in the long term,” says Goyal.

The index is rebalanced only twice in a year. This may not work in favour of the schemes, as many times price corrections in individual stocks are short-lived.

Value buying is more prominent in less researched smallcap stocks, which can best be done through actively managed funds.

“The underlying index performance looks good as the use of traditional valuations parameters for index construction ensures that large allocations are made to stocks of public sector undertakings, which are doing well as of now. Investors are better off investing in actively managed value funds with a proven track record,” says Abhay Mathure, a Mumbai-based mutual fund distributor.

What should you do?

Though value investing as a strategy is doing good, there is no assurance that it will do well in future. There are periods when each of these factors – value, growth, momentum, quality and alpha underperform broad markets. Hence, investors need to have a clear understanding of what they are getting into when they are choosing a single-factor investment strategy such as UV50.

Pankaj Mathpal, Founder of Mumbai-based Optima Money Managers, says, “Investors with a core equity portfolio made up of diversified equity funds—be it active or passive, and looking for some meaningful diversification can allocate some money to this fund.”

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Investors keen on value-focused portfolios also have the option of investing in actively managed equity schemes with a good track record. Investors keen on value investing in largecap stocks without fund manager risk have the alternative of schemes tracking Nifty50 Value 20 index.

Investors can consider UV50 only after checking the expense ratio and tracking error. Investments should ideally be considered in a staggered manner with minimum 5 years timeframe. The NFO will end on May 8, 2023.