Innovation sparks original ideas that can spawn new markets, spur growth, and shake up established players in various fields. In recent years, India’s focus on innovation and tech adoption has propelled it to become the world’s third-largest start-up hub. As companies and investors world over know, innovation is a critical driver of economic expansion and wealth generation.

In this backdrop, UTI Mutual Fund is introducing the UTI Innovation Fund, an open-ended equity scheme built around the innovation theme. The new fund offer period closes on October 9, 2023. The fund’s primary objective is to invest predominantly in forward-thinking companies and disruptors, with the capacity to achieve remarkable, non-linear growth outcomes.

In the thematic category, three innovation-focused funds from Union, Nippon and ICICI Pru MF have been launched in the last four months. In the international funds segment, there are select fund of funds (FoFs) from the Kotak, Axis and DSP MF stables that offer Indian investors a play on global innovation. So, how will UTI Innovation Fund be different? What is its investment strategy? To find out more, read on.

UTI Innovation: investment strategy

The UTI Innovation Fund’s investment strategy is built upon three core principles: innovation, growth, and quality.

* Innovation Focus: Prioritise companies that leverage innovation to boost productivity. This includes firms engaged in emerging technologies such as clean tech and those pioneering innovative processes that challenge established players.

* Growth Potential: The fund seeks companies with substantial growth potential, backed by a track record of market development and market share expansion.

* Quality Emphasis: Attention is on market leaders with robust business models, strong management, and exemplary corporate governance. It will also consider the company’s financial strength, unit economics, sustainability of growth, as well as the presence of significant entry barriers and network effects.

The UTI Innovation Fund aims to have a higher active share (benchmark: Nifty 500 TRI) due to its focus on innovation. Given the choice of benchmark, it appears the fund will be flexi-cap in nature, thus retaining the freedom to straddle the large-cap, mid-cap, and small-cap spectrum.

Asset allocation as per mandate is 80-100 per cent in equity and equity-related instruments, following the growth and innovation-oriented theme, and 0-20 per cent in debt and money market instruments.

Portfolio: Innovation stocks

UTI Innovation Fund appears to be domestically inclined in picking stocks for its portfolio. Its potential investment opportunities lie in fintech, foodtech, software, digital advertising, healthcare, speciality chemicals, cleantech and e-commerce. While the fund is new, we can take a look at how its peers have built their portfolios.

The about four-month old ICICI Prudential Innovation Fund appears fully invested, with over 70 stocks. Unlike Nippon’s offering, the top-10 holdings most concentrate on giant-caps such as ICICI Bank, Larsen & Toubro, Reliance Industries, Sun Pharma, Maruti Suzuki India and Infosys. Some MNC stocks such as Siemens and 3M India are also present. Cognizant and Microsoft are notable foreign holdings.

The recently launched Nippon India Innovation Fund has data on 23 stocks so far. Its top-10 holdings are FSN E-Commerce Ventures, Info Edge (India), One97 Communications, Affle (India), Tata Motors, TVS Motor Company, Bayer CropScience, Samvardhana Motherson International, Hindustan Unilever and Bajaj Finance. Note that the fund is not yet invested in equities to the fullest extent possible, as the portfolio is being built.

Portfolio data of Union Innovation & Opportunities Fund is not available.

Potential opportunities
It’s potential investment opportunities lie in fintech, foodtech, software, digital advertising, healthcare, speciality chemicals, cleantech and e-commerce.
Our take

Currently, three global innovation ‘fund of funds’ are available from Axis, DSP, and Kotak. These funds have a track record of one to two years.

ICICI Prudential Innovation Fund, which focuses more on the domestic market, was introduced only a few months ago, but maintains some international exposure.

UTI Innovation Fund, just like Nippon India Innovation Fund, benchmarks itself to the Nifty 500 TRI. Both offerings seem centred on innovative Indian companies.

Given the emphasis on quality, the stocks included in UTI’s portfolio are unlikely to be inexpensive.

Since the innovation theme is still emerging, offering limited options, investors with a high-risk appetite might consider UTI Innovation Fund for small SIPs (systematic investment plans) to diversify their satellite portfolio. Others may choose to wait and observe the fund’s performance and track record before investing.

Note, innovation as a theme may already be present in your existing large-cap or MNC funds. So, do your homework on the extent of differentiated portfolio in innovation funds before jumping in.