UTI Master Index Fund: Switch to Nifty Fund

Recommendation: Switch to Nifty Fund

Aarati Krishnan

IN the three years since launch, the UTI's Master Index Fund, a passive fund mirroring the BSE Sensitive Index (Sensex) has fallen behind the Sensex in performance, mainly due to underperformance in the first part of 2000.

With its Net Asset Value (NAV) at Rs 10.54 per unit, the fund has managed a holding period return of around 5.4 per cent since its launch in July 1998. The Sensex has returned around 9.5 per cent over the same period, on a point-to-point basis.

UTI's Nifty Index Fund, launched last year has a better performance track record, with a lower tracking error. Investors seeking a more diversified portfolio may, therefore, contemplate switching to the Nifty Index Fund. Others may stay invested. With the markets at low levels, this appears to be an inopportune time to exit from an index fund.

Suitability: Investors looking for a more diversified portfolio than offered by the Sensex can consider switching to the Nifty Index Fund. Due to its larger exposures in the defensive sectors, the Nifty has tended to post higher returns than the Sensex over the past three years.

Performance: The UTI's Master Index Fund trailed the Sensex in terms of holding period returns in the period from its launch (July 1998) to the last quarter of 2000. Between July 1998 and March 2000, the fund registered holding period returns of 53.6 per cent, while the Sensex notched up a return of 54.8 per cent.

In the subsequent decline to September 2000, the fund's NAV lost 20 per cent against a lower 18 per cent fall in Sensex values. But subsequently, between September 2000 and now, the fund has mirrored accurately the returns on the Sensex. The tracking error has been negligible in this period.

This apart, as an index, the Nifty has also outperformed the Sensex by a substantial margin between July 1998 and now. While Nifty has returned around 20.7 per cent since then; the Sensex has managed lower returns of around 9.5 per cent on a point to point basis.

Click here for Chart

Portfolio: Since the fund's portfolio mirrors the Sensex, it has roughly a 31 per cent exposure in FMCG sector (with Hindustan Lever constituting around 18 per cent of this exposure), a 12 per cent exposure to software, with the balance spread across cyclicals such as cement, automobiles and engineering.

>Fund facts: The Master Index Fund is an open-ended fund launched in July 1998. The fund carries no entry load and levies an exit load of 1 per cent for investments redeemed within six months. The load structure is similar to that of the Nifty Index Fund. The fund's NAV stood at Rs 10.54 per unit on May 2.