The Mid-cap space seeks to invest in emerging future market leaders. Mid-cap stocks are known for their volatile nature, which concerns many investors. Keep in mind that they offer high return potential along with higher volatility compared to Large Caps.

Given that, mid-cap stocks hold the potential to offer eye-catching returns when the tailwinds favour these smaller companies, the focus on quality while selecting mid-cap stocks ensures that the portfolio experiences lower volatility compared to that of a midcap index.

Investing in the mid-cap segment through passive funds is a suitable alternative for investors who can stomach the high-risk and are seeking a low-cost passive option for their mid-cap portfolio. Investors looking for a passive fund that brings a disciplined approach to portfolio construction while adhering to the defined quality selection process in the mid-cap universe may consider investing in the Nifty Midcap 150 Quality 50 Index.

The NIFTY Midcap 150 Quality 50 Index has higher exposure than NIFTY Midcap 150 to sectors with higher ROE and lower-earning variability like IT, Consumer Goods, Industrial Manufacturing etc. and thus offers a diversified exposure at the stock level.

UTI Mutual Fund, one of the largest asset managers has launched UTI Nifty Midcap 150 Quality 50 Index Fund. It is an open-ended scheme replicating/tracking the Nifty Midcap 150 Quality 50 TRI. This is the second fund tracking the Nifty Midcap 150 Quality 50 Index after DSP Nifty Midcap 150 Quality 50 ETF. Since this is an Index Fund, the costs would be low compared to an actively managed fund, which adds to the investors’ returns.

Table 1: UTI Nifty Midcap 150 Quality 50 Index Fund

Type An open-ended scheme replicating/tracking Nifty Midcap 150 Quality 50 TRI Category Index Fund
Investment Objective The investment objective of the scheme is to provide returns that, before expenses, closely correspond to the total returns of the securities as represented by the underlying index, subject to tracking error. However, there is no guarantee or assurance that the investment objective of the scheme will be achieved.
Min. Investment Rs 5,000/- and in multiples of Re 1 thereafter. Additional purchase Rs 1,000/- and in multiples of Re 1 thereafter. Face Value Rs 10/- per unit
Entry Load Not Applicable Exit Load Nil
Fund Manager Mr Sharwan Kumar Goyal Benchmark Index Nifty Midcap150 Quality 50 TRI
Issue Opens: March 28, 2022 Issue Closes: April 05, 2022

(Source: Scheme Information Document)

The investment strategy for UTI Nifty Midcap 150 Quality 50 Index Fund will be as follows:

UTI Nifty Midcap 150 Quality 50 Index Fund is a low-cost index fund that passively tracks the Nifty Midcap150 Quality 50 Index. The scheme endeavours to achieve a return equivalent to the underlying index while minimizing tracking error.

Based on their ‘quality’ scores, the underlying index will select the top 50 companies from its parent, the Nifty Midcap 150 index. The smart-beta investment strategy would revolve around reducing the tracking error to the least possible through regular rebalancing of the portfolio, considering the change in weights of stocks in the Index as well as the incremental collections/redemptions in the scheme. However, there is no assurance that all such buying and selling activities would necessarily benefit the fund.

The scheme is a passively managed fund, and therefore the portfolio turnover will be confined only to rebalancing of the portfolio on account of new subscriptions, redemptions, and changes in the composition of the underlying index.

A small portion of the fund may be invested in debt and money market instruments to meet the liquidity requirements. Subject to the Regulations and the applicable guidelines, the scheme may invest in other Mutual Fund schemes. The investment strategy shall be in line with the Asset Allocation as defined for the scheme.

Under normal circumstances, the Asset Allocation will be as under:

Table 2: Asset Allocation for UTI Nifty Midcap 150 Quality 50 Index Fund

Instruments Indicative Allocation (% of net assets) Risk Profile
Minimum Maximum High/Medium/Low
Securities covered by Nifty Midcap150 Quality 50 Index 95 100 Medium to High
Debt/ Money Market instruments, including Triparty Repo on Government Securities or treasury bill and units of Liquid Mutual Fund 0 5 Low

(Source: Scheme Information Document)  

About the Benchmark

The Nifty Midcap150 Quality 50 index includes the top 50 companies from its parent, the Nifty Midcap 150 index, selected based on their ‘quality’ scores. The quality score for each company is determined based on return on equity, financial leverage (except for financial services companies), and Earning Per Share (EPS) growth variability of each stock analysed during the previous 5 financial years. The weight of each stock in the index is based on a combination of the stock’s quality score and its free-float market capitalization.

Here’s the list of top constituents by weightage and sector representation under the index, as of February 28, 2022:

(Source: NSE Nifty Midcap 150 Quality 50 Index)  

Note that the index review is undertaken semi-annually based on data for six months.

Who will manage UTI Nifty Midcap 150 Quality 50 Index Fund?

Mr Sharwan Kumar Goyal will be the designated fund manager for the UTI Nifty Midcap 150 Quality 50 Index Fund. He is a CFA and holds degrees in MMS and B. Com, with an overall 14 years of experience in Risk / Fund management. He began his career with UTI AMC in June 2006, and presently he is working as Equity Fund Manager.

At UTI AMC, Mr. Goyal currently manages UTI Nifty ETF, UTI Sensex ETF, UTI Nifty Next 50 ETF, UTI Nifty Index Fund, UTI Nifty Next 50 Index Fund, UTI S&P BSE Sensex Next 50 ETF, UTI Bank ETF, UTI Arbitrage Fund (Equity Portion), UTI Nifty200 Momentum 30 Index Fund, UTI Multi Asset Fund (Equity/Gold Portion), UTI Sensex Index Fund, UTI S&P BSE Low Volatility Index Fund.

Fund Outlook – UTI Nifty Midcap 150 Quality 50 Index Fund

UTI Nifty Midcap 150 Quality 50 Index Fund aims to mirror the performance of the Nifty Midcap 150 Quality 50 Index, which captures the movement of the top 50 mid-cap companies in the market. The scheme endeavours to invest in securities in a similar proportion as the underlying index to generate parallel returns, subject to tracking errors. The fortune of this fund will rely on the performance of the underlying index.

The scheme offers investors a diversified Portfolio of relatively Quality Businesses within the midcap segment. The scheme follows a passive strategy by investing in the constituents of the NIFTY Midcap 150 Quality 50 Index, where the index construction is based on the “Quality Filters” within the midcap universe. “Quality” mid-cap companies generally rebound faster based on the strong fundamentals of balance sheets & business models and mitigate the drawdown.

A portfolio of high-quality mid-sized companies leading the market with robust business models may hold the potential to become tomorrow’s large caps. However, do note that even though the scheme is a relatively low-cost option to participate in the midcap segment of the market, investment in mid-cap stocks is a high-risk – high-return investment proposition.

UTI Nifty Midcap 150 Quality 50 Index Fund may be prone to intensified market volatility in the near term, as the looming threat of the Omicron variant, plus certain central banks of the world increasing policy rate amidst inflationary pressures, and the recent geopolitical tensions between Russia-Ukraine with a surge in crude oil prices may pose a risk to the economic growth and would have an adverse impact on mid-sized companies. This may weigh down the NIFTY Midcap 150 Quality 50 Index and its top constituents.

After the swift rally seen in the last 18 months, the margin of safety in mid and small caps appears to be narrow, and the direction of the equity markets from the current elevated levels is uncertain. These factors, among many others, could have a bearing on the scheme’s performance.

Thus, UTI Nifty Midcap 150 Quality 50 Index Fund is suitable for investors looking to take exposure in the midcap segment while investing in relatively quality businesses that may generate economic value. As mid-caps are highly volatile in nature, you must ensure a high-risk appetite and a long investment horizon of at least 5-7 years before investing in the scheme.

This article first appeared on PersonalFN here

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