The UTI Income Plus Arbitrage Active Fund of Fund is designed to offer investors an optimal mix of debt-oriented schemes and arbitrage opportunities. As an actively managed fund, it aims to capitalize on the potential of both the debt and equity markets, offering a diversified investment approach. Below, we break down the essential details of this mutual fund scheme to help potential investors understand its allocation, investment strategies, and performance benchmarks.
Asset Allocation Strategy
The scheme primarily invests in mutual fund schemes that focus on debt-oriented investments and arbitrage funds. The asset allocation is guided by SEBI regulations and is structured to achieve optimal risk-adjusted returns.
Debt-Oriented Mutual Funds: These funds are aimed at providing relatively stable returns by investing in fixed income securities. The scheme allocates 3% to 5% of its total assets in debt-oriented mutual funds, which typically include bonds and other debt instruments.
Arbitrage Funds: These funds capitalize on price differentials between the cash and derivatives markets. The scheme has a larger allocation of 35% to 65% in arbitrage funds, which can provide opportunities for profit in the equity market without exposing the investor to significant market risk.
Money Market Instruments: The fund has a minimal exposure of up to 5% in money market instruments. These instruments include commercial papers, treasury bills, certificates of deposit, and short-term government securities with a residual maturity of up to one year.
The investment philosophy behind this asset allocation is to maintain a balanced approach between low-risk debt investments and higher-return arbitrage strategies. The fund aims to adjust the allocation dynamically based on market conditions and economic factors.
Investment Strategy
The primary investment strategy of the UTI Income Plus Arbitrage Active Fund of Fund is to optimize risk-adjusted returns by allocating investments across domestic debt-oriented mutual funds and arbitrage mutual fund schemes.
The debt-oriented schemes in the fund provide stability and generate steady income, particularly in a fluctuating interest rate environment.
The arbitrage funds, on the other hand, exploit the price discrepancies between the spot and futures markets. These strategies typically aim to deliver returns irrespective of market volatility, making them appealing in uncertain market conditions.
The allocation between these two asset classes is actively managed by the fund manager, who will base decisions on macroeconomic conditions, interest rate expectations, liquidity, and arbitrage opportunities in the equity markets. This flexibility allows the fund to take advantage of emerging opportunities while mitigating risk.
Benchmarking the Scheme
The benchmark for this fund is a combination of two indices: 60% CRISIL Short Duration Debt A-II Index and 40% Nifty 50 Arbitrage TRI. This dual-indicator benchmark reflects the scheme’s investment approach, with 60% of its returns driven by debt instruments and 40% through arbitrage opportunities in the equity market.
The fund’s performance will be measured against the Total Return Variant of this index, which includes both price and income returns. This benchmark provides a clear and appropriate comparison for the fund’s performance, ensuring that it aligns with the scheme’s dual focus on debt and arbitrage strategies.
Investment Restrictions and Limitations
The scheme has certain investment restrictions to ensure that it adheres to regulatory guidelines. Notably, it will not engage in high-risk activities like securities lending, derivatives for hedging or non-hedging purposes, or investments in international securities like REITs and InvITs. Additionally, the fund will not invest in instruments such as credit default swaps or securitized debt. These restrictions are designed to limit exposure to high-risk asset classes and focus on the scheme’s core objectives.
