UTI Mutual Fund's new fund offer -- UTI SPrEAD Fund -- is an open-ended equity fund that seeks to generate market neutral returns.
The investment objective of UTI SPrEAD is to provide capital appreciation and dividend distribution through arbitrage opportunities arising out of price differences between the cash and derivative market by investing predominantly in equity, derivatives and the balance portion in debt securities.
The return of the fund is expected to be as per the extent of arbitrage opportunity; no matter what direction and to what extent the market rises or falls. Hence, investors should note that this fund will not deliver the high returns that one has been used to from equity funds, but at the same time it is not expected to give negative returns either.
Similar products have been launched in the past too, like JM Equity and Derivate Fund, Kotak Cashplus, and Pru ICICI Blended Plan A. However, now SEBI regulations allow higher exposure to derivatives than was possible earlier.
Experts believe that for a long-term investor, such a product is an excellent choice as a defensive investment especially in a volatile investment climate.
Advisor Hemant Rustagi feels that UTI SPrEAD is a good investment option for conservative investors, and for equity investors who wish to invest their surplus cash as this fund would yield better returns than floating rate debt funds. Also, due to its equity nature, post tax returns would go higher in this fund as compared to debt funds, he adds.
However, on the flipside, investment expert Sandeep Shanbhag feels that lack of arbitrage opportunities in the market is a concern for the fund. He says, ?In a period where arbitrage opportunities do not exist or are few, the fund would have to depend upon its fixed income investment to deliver return.?
But, Sundeep Patel, Fund Manager of UTI SPrEAD Fund clarifies that 'lack of arbitrage opportunities in the market' is a hypothetical concern. He says, "Arbitrage opportunities are ample in the market, though stocks might be few. For example in a negative market too I see stocks that are trading at a premium. What's important is that it's a risk free product that will never give negative returns."
"UTI SPrEAD is also expected to have an annual average of 65% to maintain the equity nature of the schemes. While experts believe that by maintaining a 65% in equity this fund can take tax advantage applicable to equity funds, there needs to be clarification on whether the fund will be forced to take naked positions (un-hedged positions in equity) just to maintain the asset allocation," he adds.
"No un-hedged positions in equity would be taken," clarifies Patel. He is confident of achieving an annual average of 65% in equity as he says, "Maintaining equity nature is not a concern for us."
Lastly, it being an interval fund, experts feel that the liquidity in UTI SPrEAD is not as high as in an open-ended fund.
But Patel has an answer to that is: "UTI SPrEAD is a structured product, and is a trade-off between higher liquidity and higher returns. The fund offers exit option every month. Investors can put their redemption requests on any day of the month, and the cheques would be issued on the last Thursday of every month."
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