Investment Objective*

The investment objective of the scheme is to provide medium to long term capital appreciation alongwith income tax benefit. *Source: Offer Document

Is this fund for you?

Tax-saving funds (also known as equity linked savings scheme/ELSS) are diversified equity funds that offer investors an opportunity to save tax under Section 80C of the Income Tax Act. UTI Long Term Advantage Fund (UTILTAF) falls under the same category. UTILTAF is a 10-Yr close-ended tax-saving fund, with an initial 3-Yr lock-in period (which is mandatory for tax-saving funds). For investors, this is yet another fund that aims at generating capital appreciation by investing in mid and small cap stocks. Personalfn's view on investments in mid/small cap stocks: Typically, mid/small companies tend to be under-researched ones, thereby providing an investment opportunity that is yet to be identified by the market. Investments in such companies offer high growth potential and the opportunity to clock above-average returns over the long-term horizon. On the flipside, since mid/small-sized companies are often under-researched, there is a fair chance that some reasons for "not investing" could be overlooked. As risk control measures and corporate governance tend to be neglected, the chance of manipulation in such companies is higher. Similarly, the possibility of stocks remaining illiquid even at the end of the investment horizon does exist; this in turn can be an risky investment proposition for the fund manager. In all aspects, barring the close-ended nature, this NFO does not offer anything significantly different from existing mid cap funds. In fact, it does not even mention the market cap ceiling for mid cap stocks, leaving this decision to the whims of the fund management team. Usually, fund houses have a clear demarcation between their mid cap and large cap universe in terms of market capitalisation; this demarcation is not available in UTILTAF's offer document. Instead, a small company is defined as "those generally holding a niche position in a rapidly growing sector of the economy". This definition needs further elaboration, because going by it, even Hindustan Lever, which has a limited presence in the water purifier segment, can qualify as a small cap UTI's track record in managing equity funds is nothing to write home about. Their existing, open-ended tax-saving fund - UTI Equity Tax Savings Plan has grown by 23.4% CAGR and 30.4% CAGR over 3-Yr and 5-Yr respectively. Well-managed tax-saving funds like HDFC Tax Saver (45.8% CAGR and 45.8% CAGR over 3-Yr and 5-Yr respectively) and HDFC Long Term Advantage (38.1% CAGR and 48.9% CAGR over 3-Yr and 5-Yr respectively) have performed decidedly better. Perhaps, the only striking feature of this NFO is its offer period, which spans over 3 months (December 21, 2006 to March 20, 2007). Ignore this feature and UTILTAF has nothing new to offer to the investor. In our view, investors must give UTILTAF a miss. Instead, they must opt for existing tax-saving funds like HDFC Tax Saver (an aggressive, growth style fund) and HDFC Long Term Advantage (a conservative, value style fund), which have established track records over the long-term. Investors who find UTILTAF interesting because of the mid cap appeal, are better off considering Franklin India Prima Fund and Sundaram BNP Paribas Select Midcap, two of the best, long-standing mid cap funds in the country.

Portfolio Strategy

The fund is mandated to invest between 80%-100% of assets in equity and related instruments. It can also allocate upto 20% of assets in debt and money market instruments. Instruments Allocation Range Equity and equity related instruments 80%-100% Debt and money market instruments 0%-20% The fund will be investing primarily in mid/small cap stocks that have the potential to blossom into large caps over time. It has the option to use derivatives for hedging its portfolio.

Fund Manager Profile

Mrs. Swati Kulkarni, (B.Com, MFM, CAIIB) is Vice President and Fund Manager at UTI Mutual Fund. She worked in Reliance Industries Ltd. for a year before joining UTI in 1992. Initially, she handled mutual fund research and market research, among other responsibilities, before being initiated into the fund management team in 1998.

Outlook

Investing in UTILTAF will be subject to the risks that have come to be closely associated with mid cap stocks - above average volatility. However, the flexibility to allocate upto 20% in debt can help the fund counter volatility considerably. Over the long-term (at least 5 years in our view), a basket of carefully selected mid cap companies can add considerably to the risk-taking investor's portfolio. We have considered 5 years as the minimum time frame for investing in mid caps because they can typically take at least that long to unlock their potential.

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