UTI RGESS: A low cost option
MDT | 04 February 2013

UTI Mutual Fund recently filed offer documents with the Securities and Exchange Board of India to launch an open-ended as well as a close-ended ended index scheme—UTI RGESS. As these are index schemes, the expense ratio is capped at 1.70% (excluding the additional expense ratio depending on the inflow from the beyond 15 cities). As many as seven mutual fund companies that have filed offer documents to launch schemes that qualify under the government notified Rajiv Gandhi Equity Saving Scheme (RGESS). These schemes are targeted at first-time investors to encourage them to invest in equities by providing them a tax rebate for their investment. However, as Moneylife had recently pointed out that though investing through these schemes give investors the benefit of diversification and professional fund management, the costs associated with these schemes can go as high as 3% per annum. (Read: RGESS mutual fund schemes: High costs could erode returns)
The schemes from UTI Mutual Fund would invest 95%-100% of the portfolio in stocks of companies comprising the S&P CNX Nifty Index in the same weightage as in the index. The close-ended scheme would have a tenure of three years from the date of allotment. In the open-ended scheme, investors would have to complete the mandatory lock-in period of three years as specified under RGESS, post which they can choose to redeem or switch their investment if they do not wish to continue.
Actively managed schemes have delivered better returns than the index in the past. But choosing the right scheme is equally important. However, when in doubt, index schemes would be a preferred option. This would specifically be the case when choosing the right equity scheme for RGESS as eligible actively managed schemes would not have a long-term track record in order to judge their performance. Of course one could choose schemes of fund houses which have had an excellent track record of managing equity schemes but one has to keep an eye out on costs, as well. Would a fund manager be able to provide superior return post costs and justify the additional expense ratio of 1%?
Index schemes are expected to deliver returns that are close to those of the index. As the fund manager does not have to put in much effort, the cost structure of these schemes is lower than that of actively-managed schemes. The cost for index schemes goes up to 1.70%; for other equity schemes, the costs are capped at 2.70% (excluding the additional expense ratio depending on the inflow from the beyond 15 cities).
UTI Mutual Fund has a long history of managing equity schemes. Under the passive investing category it has just one index scheme—UTI Nifty Fund—based on the S&P Index. The scheme which was lunched in February 2000 has a corpus of Rs186 crore and an expense ratio of 1.50%. The scheme has a reasonably low tracking error over the last few years. Over the last one year and five years the scheme delivered a return of 19.42% and 7.41%. The S&P Nifty delivered a return of 19.92% and 7.40% over the same periods, respectively. However, the returns you are able to derive depend a lot on how and when you invest. The UTI  Nifty Fund is managed by Kaushik Basu who has an experience of over 25 years in the industry. He would also be managing the new UTI RGESS fund.