UTI Mutual Fund came out with its UTI Nifty 500 Value 50 Index Fund new fund offer (NFO) on April 26, 2023. The offer which would last till May 08, 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 must include this fund in their investment portfolios. Some argue in favour of the benefit of investing in a huge basket of 500 stocks, thus, downplaying the risk of volatility in a particular sector(s). However, there is more to investing than just the investment base and possible yields from the investment.
A tête-à-tête with some personal financial experts reveals the myriad factors that are at play while investing in a particular mutual fund, especially, if it is an NFO.
Girish Ganaraj, Co-founder, Finwise Personal Finance Solutions shared, “The Nifty 500 Value 50 Index fund is a factor index. It has only 50 stocks, which add “value” from a style point of view. Hence, it is not as diversified as a Nifty 500 or even Nifty 50, since it will underperform when the value theme underperforms. This requires the investor to know the future prospects of how this theme will perform before choosing to invest. Value as a theme is more volatile than the broader market, which is something investors must know before investing. Secondly, since it is selected from the Nifty 500, it will also likely have some mid/small cap representation. This can make it a bit more volatile.”
Ganaraj added, “Hence for a new investor, who wishes to invest in index funds, a diversified index fund is better. For those who are already having adequate diversified index funds, this can be a small portion of your portfolio, though after fully understanding the underlying risks.”
Dev Ashish, a SEBI registered investment advisor, and Founder, StableInvestor.com said, “While the charm of passive nature of this value offering may have its takers, it much also be seen that this is a new offering with even the index having a limited track record. Also, in value investing, stocks are bought when the market prices go below fair value (based on factors like PE, PBV, etc.). But the index here gets rebalanced only twice a year. So, this may not work very well as often, the price corrections in stocks are sharp and short-lived and so, the index may not be able to take advantage of it.”
“Investors should not rush to invest as most investor’s requirements are sufficiently met via a portfolio made up of passive large-cap funds, Flexicap funds, and large & midcap funds. Also, value investing, by design (and like any other strategy), will not work all the time. So, if someone invests in this, they should be willing to patiently wait out phases of underperformance periodically,” adds Ashish.
Rishabh Parakh, Chief Play Officer, NRP Capitals explained, “One is always good with either a pure index fund if the objective is to have a low-cost passive investing allocation to one’s portfolio. 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 Adviser and Finance Blogger at BasuNivesh furthered, “We can't overlook the volatility of this Index, even if it comprises of 50 stocks among the Nifty 500 based on four methods with equal weightage to Earnings to Price ratio (E/P), Book Value to Price ratio (B/P), Sales to Price ratio (S/P), and Dividend Yield. When comparing the Nifty 500 Value 50 Index to the Nifty 50 or Nifty 500 Indices, you noticed that the volatility is higher.”
He added, “Outperformance is accompanied by increased volatility (even greater than the Nifty 500 Index). As a result, investors should keep in mind that the fund may own small-cap or mid-cap stocks because the index is constructed using the four parameters indicated above rather than the market capitalization method. As a result, rather than blindly investing based on just it being an Index Fund and stocks comprising 50 of the universe of 500, one should consider the volatility, tracking error, and expense ratio of the fund. Considering all of these aspects, I recommend waiting and watching, particularly for tracking error and expense ratios. Then, if they are comfortable with the Index's volatility, they can make a call.”
Irrespective of how enticing a mutual fund may portfolio may sound, one must not jump in to invest in an NFO. Most investors allocate their earnings to an NFO misconstruing that it would allow them to accumulate more units at a lower net asset value (NAV). However, ignoring factors like the possibility of good returns, expense ratios, fund portfolio, fund management, etc. may cause you to lose more than earn in the long run.