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UTI Mutual Fund (UTI MF) on Wednesday launched a new fund offer (NFO) for a focused equity fund, which is an open-ended equity scheme that will invest in a maximum of 30 stocks across market capitalizations (m-cap). The NFO will close for subscription on 18 August.

Focused equity funds invest in a limited variety of stocks, and seek to maximize returns by investing in high-performing assets with growth potential. Typically, diversified equity funds hold anywhere between 50 and 100 stocks.

The UTI Focused Equity Fund, which will be managed by Sudhanshu Asthana, will track the Nifty 500 total return index (TRI). The minimum investment in the scheme is 5,000, and in multiples of 1 thereafter. There will be an exit load of 1% in the scheme for less than one year, and nil after one year.

According to the fund house, the scheme will follow a blend of growth and value style, with a growth tilt.

There are about 20 focused equity schemes available in the market, and the category has delivered an average return of nearly 50% over the past one year.

According to Asthana, the fund house will leverage its research framework, investment process and the experience of its investment team to make its scheme unique in an already crowded segment.

“The fund will be optimally diversified by investing across market capitalization and sectors. As the fund is benchmark- and market-cap-agnostic, it will have a high active share and will have a distinct portfolio relative to the broader indices to create potential alpha," Asthana said.

Stocks will be picked by a bottom-up approach, wherein preference will be given to quality companies with long runway for growth and transformation, and mean reversion opportunities.

While building the portfolio, UTI MF will avoid companies with management issues, high leverage, sustainability challenges, inconsistent cash flows and inferior return on capital employed (RoCE).

The scheme will invest 65-100% in equity and equity-related instruments, up to 25% in debt and money market instruments, including securitized debt, and up to 10% in units issued by real estate investment trusts (Reits) and infrastructure investment trusts (InvITs).

“We will be minimum 65% invested in equities by 30 September, and depending on the opportunities available, we might be invested higher by this date. We do believe that though the current market conditions might look uncertain, there are enough opportunities which have reasonable growth and headroom for reasonable returns," said Asthana.

While the markets have had a decent run over the past year, the fund house believes that within each sector there are opportunities to invest, although some parts of the sector might be frothy.

“As our fund is purely bottom-up in its approach, we at any time would invest in the best ideas we have at the point of time. Sector allocation is not an input in the construction of the portfolio, and will be more of an outcome depending on the 30 stocks selected through our investment framework," he added.

Overall, focused equity funds have failed to beat returns given by multi-cap funds, and financial advisers are of the opinion that investors would be better off with diversified equity funds.

Melvin Joseph, a Sebi-registered investment adviser and founder of Finvin Financial Planners, who doesn’t recommend focused equity funds, said some funds started performing in the category, which attracted investors towards it.

“The purpose of mutual funds is diversification, but according to me, focused equity funds act as a mini-PMS (portfolio management service). In a mutual fund, investors should diversify across 50-60 stocks, but focused equity funds diversify in limited stocks. However, if a fund manager’s stock selection is correct, then such funds will perform well. Still, I believe that for retail investors, a diversified equity fund such as multi-cap or flexi-cap would be a better bet," said Joseph.

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