UTI Mutual Fund came out on April 26, 2023 with its UTI Nifty 500 Value 50 Index Fund new fund offering (NFO). The offering, which would last until May 8, 2023, would allow people to invest in an open-ended index fund scheme replicating the Nifty 500 Value 50 Total Return Index.
Many investors are inclined to know if they should include this fund in their investment portfolio. Some argue for the benefit of investing in a huge basket of 500 stocks, downplaying the risk of volatility in a particular sector(s). However, investing involves more than just the investment basis and the potential returns of the investment.
A tête-à-tête with some personal finance experts reveals the myriad factors that go into investing in any given mutual fund, especially if it’s an NFO.
Girish Ganaraj, co-founder, Finwise personal finance solutions shared: “The Nifty 500 Value 50 Index fund is a factor index. It only has 50 stocks, which add “value” from a style point of view. Therefore, it is not as diversified as a Nifty 500 or even Nifty 50, because it underperforms when the value theme underperforms. This requires the investor to know the future outlook of how this theme will perform before choosing to invest. Value as a theme is more volatile than the broader market, something investors should know before investing. Second, as it’s selected from the Nifty 500, it’s likely to have mid/small cap representation as well. This can make it a bit more volatile.”
Ganaraj added, “Hence, for a new investor, who wants to invest in index funds, a diversified index fund is better. For those who already have sufficiently diversified index funds, this may be a small portion of your portfolio, but after you fully understand the underlying risks.
Dev Ashish, one SEBI Registered Investment Advisor and Founder, StableInvestor.com said: “While the charm of the passive nature of this value offering may have its takers, it is also clear that this is a new offering, with even the index having a limited track record. Also in value investing, stocks are bought when market prices fall below fair value (based on factors such as PE, PBV, etc.). But the index here is only rebalanced twice a year. So this may not work as well as it often does, the price corrections in stocks are sharp and short lived so the index may not be able to benefit from them.
“Investors should not rush to invest as most investor needs are adequately met through a portfolio consisting of passive large cap funds, Flexicap funds and large and mid cap funds. Moreover, by design (and like any other strategy), value investing will not always work. So if someone invests in this, they have to be willing to patiently wait out periodic periods of underperformance,” added Ashish.
Rishabh Parakh, Chief Play Officer, NRP Capitals explains: “One is always good with either a pure index fund if the goal is to invest passively in the portfolio at a low cost. Just go for a pure Nifty 50 or Sensex fund. But if you want a higher risk-return proposition, go for mid-cap or diversified schemes to beat the index.
Basavaraj Tonagatti, a SEBI Registered Investment Advisor and Financial Blogger at BasuNivesh continued: “We cannot overlook the volatility of this Index, even though it consists of 50 stocks from the Nifty 500 based on four methods with an equal weighting of earnings-price ratio (E/P), book value- price ratio (B/P), sales price ratio (S/P) and dividend yield. If you compare the Nifty 500 Value 50 Index with the Nifty 50 or Nifty 500 Indices, you notice that the volatility is higher.”
He added: “Outperformance comes with greater volatility (even greater than the Nifty 500 Index). Therefore, investors should note that the fund may hold small-cap or mid-cap stocks, as the index is constructed based on the above four parameters rather than the market capitalization method. As a result, rather than blindly investing based on the fact that it is an index fund and stocks comprising 50 of the universe of 500, one should consider the fund’s volatility, tracking error, and expense ratio. Given all these aspects, I recommend waiting and watching, especially for tracking errors and expense ratios. Then when they feel comfortable with the volatility of the Index, they can call.”
No matter how attractive a mutual fund portfolio may sound, one should not step in to invest in an NFO. Most investors allocate their earnings to an NFO that misinterprets that it would allow them to accumulate more units at a lower net asset value (NAV). However, ignoring factors such as the possibility of good returns, expense ratios, fund portfolio, fund management, etc. can result in you losing more than you earn in the long run.
Investing in NPS is relatively low risk compared to an SIP