UTI Index Select Equity Fund: Hold

Recommendation: Hold

Suresh Krishnamurthy

INVESTMENTS in the UTI's Index Select Equity Fund can be maintained.

The performance of the fund in a falling market the last year was better than that of such benchmark indices as Nifty and Sensex. It has, in fact, fared well compared to some of its fancied peers too. Given this backdrop, investors can stay with the fund, but need not enhance exposures.

Those who do not have exposure to the fund can also buy into it. However, it is possible that in the event of a bull-run in stock prices the fund will underperform its peers. Essentially, the fund can be viewed as an alternative to a passively managed index fund by long-term investors.

Investors whose only exposure to equities is through this fund should, however, switch a portion of their funds to other funds with a consistent performance record over a longer period.

Suitability: The fund's mandate is to invest in stocks that constitute the Nifty Index. This restricts the universe of stocks it can invest in and may reduce the return generated by the fund over a longer period. On the other hand, considering that the index includes relatively more liquid stocks, the risk can be expected to be lower relative to other actively managed funds.

Overall, the fund can be considered a defensive investment proposition, especially in a falling market. Given that the outlook for the market is still uncertain, the fund is suitable for a conservative investor's portfolio.

Performance: Since March 2000, the UTI ISEF's performance has been better than that of benchmark indices. However, a few other diversified funds have been able to record a substantially better performance over the same period.

Since December 2000, the fund's performance stacks up favourably against its peers and the benchmark indices too. The fund has trailed some of its peers in the past three months and has recorded only a marginal outperformance over the benchmark indices.

Portfolio allocation: The fund is generally fully invested. This is now emerging as one of its characteristics. At the end of September 2001, the cash position was just above 2 per cent.

The fund was overweight on consumer goods at the end of September 2001. This could be behind the relatively unimpressive performance since then. Otherwise, the fund had invested just less than 10 per cent in software and around 11 per cent in healthcare stocks. This is just around their weight in the indices.

The fund is also overweight on diversified stocks. With diversified companies such as Grasim in the portfolio, the overall exposure to cement is also higher than that in the index. The fund is underweight on the banking and auto sectors. In stocks, the top exposures are Hindustan Lever, Reliance Industries, ITC, L&T and Dr. Reddy's Labs.