The fund will track the Nifty200 Momentum 30 index, but it is different from a traditional passive index scheme. Such strategies try to outperform the benchmark index. In this scheme, stocks will be selected based on their momentum score, which is determined based on its six- and 12-month price returns, after adjusting 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. Individual stock exposure will be capped at 5%. “It’s a rule-based quant fund and such strategies work well over the longer term. However, it carries higher risk and should be treated it like a midcap fund,” says Vijay Kuppa, founder, Orowealth.
Wealth managers said momentum is aggressive investment style and carries higher risk and the fund could see period of relative underperformance if there is a sharp change in market cycles or when there is sharp recovery or drop. UTI said that the index has underperformed Nifty200 Index only three out of 16 calendar years in this strategy, as shown by back test results.
While there is a 5% cap on individual stock weight, there is no sectoral cap, exposing an investor to that risk. Financial planners feel that first-time investors should not invest in it merely because the cost is low. “Quant strategies are typically meant for sophisticated investors. First-time investors are better off with diversified equity mutual funds and should avoid this fund,” says Vineet Nanda, founder, Sift Capital.