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Going Passive: Motilal Oswal Launches Four New Index Funds
August 23, 2019

A fund house with an over three-decade lineage in active investing, Motilal Oswal AMC has launched four new index funds in the multi cap, mid cap, small cap and banking sector space. iFAST Research looks into the rationale of these funds, and their suitability for our investors.

Author : iFAST Research

The Mutual Fund Industry is going through a jittery phase with investors facing a volatile market and having their confidence in equities tested to the hilt. This volatility has also thrown open a debate on 'Active vs Passive investing' in the market. We as a team see this as a matter of portfolio allocation, and believe that actively managed and passive funds can safely co-exist in investor portfolios. Our view seems to be backed by Motilal Oswal Mutual Fund (MOAMC), a fund house that has a lineage of active investing for over three decades. The Motilal Oswal Group is known to have published more than 30,000 equity research reports across 260 companies and more than 21 sectors, and has a patron who has been trading in the Indian markets for so long, and with such success, that his Annual Motilal Oswal Wealth Creation Study is sought after by experts and investors alike. The investment philosophy of the group is Buy Right: Sit Tight and the investment process followed across all the verticals of the group is Quality, Growth, Longevity and Price (QGLP).

Motilal Oswal Mutual Fund began its operations by first launching exchange traded funds (ETFs) and then went on to the actively managed space, which is actually considered to be its forte. We were one of the first few research teams in the country to publish a detailed note on the first actively managed fund from this fund house, back in 2013. After six years, the fund house is in an innovative mode again, and is launching its first four index funds; and we, as a team, are happy to introduce these too to our investors.

Motilal Oswal Mutual Fund is launching the following four index funds: Motilal Oswal Nifty 500 Fund (MOFNIFTY500), Motilal Oswal Nifty Midcap 150 Index Fund (MOFMIDCAP), Motilal Oswal Nifty Smallcap 250 Index Fund (MOFSMALLCAP) and Motilal Oswal Nifty Bank Index Fund (MOFNIFTYBANK). It is interesting to note here that the four funds represent categories where there are many actively managed funds. In this context, we wanted to understand from the MOAMC team what factors playing out in the industry gave them the confidence to launch ETFs and index funds along with actively managed funds, and the following were the reasons given:

• As per their mandate Retirement Funds (like NPS, EPFOs) are required to invest at least 5% of their annual accretion in equities. Here, the preferred investment vehicle is ETFs/index funds.

• SEBI's categorisation and rationalisation of Mutual Fund Schemes has made it difficult for schemes to go outside their stipulated universe and create alpha.

• The benchmark of funds has been changed to Total Return Index (TRI) from Price Return Index (PRI), and this has weakened performance comparison.

• Indian markets are slowly entering a phase of improved efficiency, and reduced information asymmetry.


Motilal Oswal Nifty 500 Fund (MOFNIFTY500)

The Nifty 500 Index constitutes the top 500 companies selected based on full market capitalisation. This index has a multi cap profile with 80% of the stocks being large caps and the rest mid/small caps. The team at MOAMC believes that this index is capable of absorbing the risk of mid and small cap stocks, while giving better returns than the Nifty 50 index over the long term.

Top 10 Holdings of the Index

Data as on June 30, 2019 Source: MOAMC

Motilal Oswal Nifty Midcap 150 Index Fund (MOFMIDCAP)

The Nifty Midcap 150 Index represents the next 150 companies (ranked 101 to 250) based on full market capitalisation. There are three advantages of following this index: it is more diversified than a Nifty 50 index (2 stocks account for 25% of the large cap index, while in this case, 15 companies account for 25% of the index); it has a better ability to deliver superior returns in the long term; and it has favourable valuations currently.

Top 10 Holdings of the Index

Data as on June 30, 2019 Source: MOAMC

Motilal Oswal Nifty Smallcap 250 Index Fund (MOFSMALLCAP)

The Nifty Smallcap 250 Index consists of the balance 250 companies (companies ranked 251 to 500) from Nifty 500 companies. This index is expected to be more volatile than other small cap funds, and as per the Fund Management team, "This is because other small-cap funds have historically held ~50% of funds in mid and large cap space. Today the top 5 small-cap funds hold only 53-65% small-cap stocks." However, the reasoning behind launching an index fund in this category is that the small caps are looking attractive at the current valuation levels and are expected to outperform the broader indices over the long term.

Top Holdings of the Index

Data as on June 30, 2019 Source: MOAMC

Motilal Oswal Nifty Bank Index Fund (MOFNIFTYBANK)

The Nifty Bank Index consists of the most liquid and large Indian banks. It comprises of 12 banks listed on NSE.

As per MOAMC, the banking sector has the advantage on account of 4 factors:

• Robust demand (increase in working population and rising disposable income; huge potential in the rural banking segment)

• Improving business fundamentals (rising fee incomes, high net interest margins and low NPA levels)

• Innovation in services (mobile, internet banking services; huge un-banked population that increases the potential for innovation in delivery)

• Greater policy support (positive measures undertaken for more private sector participation and liquidity infusion; healthy regulatory oversight and credible monetary policy by RBI is bringing stability to the country's banking sector) .

Top 10 Holdings of the Index

Data as on June 30, 2019 Source: MOAMC


Our Take

For iFAST Research, all the four categories where MOAMC has launched the index funds are a part of our moderately aggressive and aggressive portfolios. We believe that although passive funds have their own advantages like low cost, elimination of fund manager risk, diversification and transparency, they are not free from risks, and can also be subject to volatility in accordance with the underlying asset class. The fact that the mid cap and the small cap indices comprise only of mid cap and small cap stocks makes them more volatile than actively managed funds. As far as the Banking index fund is concerned, it is more concentrated than the actively managed banking funds, which again ranks it higher on the risk-return radar.

However, as mentioned earlier as well, we believe in using portfolio allocation strategies to balance returns and risk. Thus, whenever we recommended mid cap funds or small cap funds or banking funds, we follow the principle of selecting funds that have the maximum exposure into that category as this creates adequate alpha, while the downside would be protected by the large cap funds and multi cap funds included in the portfolios.

We recommend the same approach for these index funds as well. Although these funds are passive in nature, they are strictly recommended for risk taking investors who are not rattled by constant volatility. We also advise that these funds be included in portfolios whose time horizon is more than 5 years.


Happy Investing!!!




ifast and/or its content and research team's licensed representatives may own or have positions in the mutual funds of any of the asset management company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. this article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. no investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. the value of mutual funds and the income from them may fall as well as rise. opinions expressed herein are subject to change without notice. please read our disclaimer on the website.

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