NFO: UTI Nifty 200 Momentum 30 Index Fund opens; should you invest?

UTI Nifty 200 Momentum 30 Index Fund is a lower cost vehicle to capture momentum based investing; it follows smart beta strategy and can reduce subjective bias

Staff Writer   /   February 22, 2021

UTI Mutual Fund has introduced India’s first ever momentum based index fund – UTI Nifty 200 Momentum 30 Index Fund. The new index fund aims to follow an index tracking the performance of the top 30 trending stocks within the Nifty 200. The NFO opened on February 18 and will close on March 4, before reopening on March 12 for continuing subscriptions and redemptions. Read on to know more

What is Momentum Investing

In general, a trend is the broad upward or downward movements of stock prices. Upward movements are called as uptrends, while those which move lower are said to be downtrends. At its core, a momentum-based portfolio is constructed believing that investments that have performed relatively well, continue to perform relatively well and those that have performed relatively poorly, continue to perform relatively poorly.

Momentum investing broadly refers to capturing the ‘trend in movements of stock prices’ and going along with the general opinion of the market with an underlying belief that prices are a true reflection of investors’ reaction to the publicly available knowledge.

Globally, there are many momentum based mutual funds such as iShare MSCI USA Momentum Factor ETF, Invesco DWA Momentum ETF and Invesco S&P Midcap Momentum ETF.

New fund in India

While many investors practice momentum investing, in India there was so far no momentum based index fund. UTI Nifty 200 Momentum 30 Index Fund changes this scenario.

The Nifty 200 Momentum 30 Index aims to track the performance of the top 30 companies with high momentum within the Nifty 200 Index. Stocks are selected based on their normalized momentum score which is determined based on its six-month and 12-month price return, adjusted for its daily price volatility. Stock weights are based on a combination of the stock’s normalised momentum score and its free-float market capitalisation.

At this moment, the index’s top weights are Wipro, M&M, Infosys, HCL Tech., and JSW Steel . Currently, the index is overweight on IT, Consumer Goods & Pharma sectors, whereas underweight on Financial Services. Do remember the portfolio drifts towards sectors which have shown strong momentum. Aggressive sector rotation has worked well for the index historically.

Compared to Nifty 50 TRI and Nifty 300 TRI, the momentum index has done well. For instance, Nifty 200 Momentum 30 has captured 102% of Nifty 200 up moves, whereas it has lost less than Nifty 200 about 83% during the periods when Nifty200 has declined. Similarly, the momentum index has captured 101% of Nifty 50 up moves, whereas it has lost less than Nifty 50 about 81% during the periods when Nifty 50 has declined. Also, between Nifty 200 Momentum 30 and Nifty 200, the former has under-performed the latter in only three calendar years out of the last 16 years. But most of the data for the momentum index is based on back-tested data, as the index was launched last year.

Do remember, momentum is an aggressive investment style and is relatively riskier as compared to Nifty 200 and Nifty 50. So, it may undergo periods of relative under-performance when there is sharp change in market cycles like sharp recovery or sharp drop.

Why invest in the index fund

The UTI Nifty 200 Momentum 30 Index Fund offers a portfolio that systematically adds relatively performing stocks and removes relatively non-performing stocks, based on predefined criteria, without individuals’ intervention.

The addition and removal of components is majorly driven by movements in prices of stocks, which is a reflection of market trend. One can argue the fund will add winners and remove laggards based on well defined processes.

But do understand that given the risk-profile of the fund, your money in UTI Nifty 200 Momentum 30 Index Fund will be at ‘very high’ risk. So, a momentum strategy is not really suited for conservative investors.

Why UTI MF

UTI MF offers index funds with low ‘tracking error’. This can be looked at as a strength of managing index funds. Both UTI Nifty Index Fund and UTI Nifty Next 50 Index Fund have low tracking errors.

UTI MF manages 26% of ‘Index Fund’ AUM in the industry spread across 2 lakh folios.

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