In past one year, the markets have taken the investors on a roller coaster ride, with the recent biggest monthly fall of 177 point in Nifty and 600 points fall in Sensex. Due to a host of domestic and international macro and micro economic factors the markets are spiralling downward.
However, it is offering opportunities to do value buying. But it’s getting challenging as the current pricing do not justify the muted earnings of the companies. Thus, actively managed funds seem like they have taken a back seat for now. As investors are losing money and are paying higher charges for actively managed funds, which is not going down well with investors.
Plus, investors are not ready to bear any more risk for higher returns, instead are preferring moderate returns in line with the benchmark index through passive management, i.e. in Index Funds.
[Read: Should You Be Investing In Passive Funds Now?]
Index funds basically as per the categorisation norms are described as funds that will invest a minimum 95% of total assets of the scheme in securities of a particular index. They have a portfolio comprising of stocks of securities in line (weightage composition-wise) with that of the tracking index. This tracking is called indexing, a passive form of fund management.
The fund manager tries to build and match the portfolio, whose holdings mirror the securities of a standard index. An index constitutes, as a representative collection of stocks that are important for the economy.
Index stocks are selected on a free-float basis and adjustments are made from time to time, keeping in view market conditions, market opportunities, applicable regulations and economic factors. Stock must be available for trading in the futures and options segment to be eligible for inclusion in an index. Besides, market capitalisation, liquidity and trading frequency are other criteria.
The idea is that by mimicking the profile of the benchmark index, an index fund will match its performance as well. Hence, it does not require active management, so the overall cost (expense ratio and other fees) are low as compared to an actively managed fund, making it more cost-efficient.
In brief, index funds are:
- Highly cost-efficient due to low total expense ratio
- Diversified because it consists of top companies from across sectors in term of free-float market capitalisation
- Free from fund manager’ s biased error or inefficiency in terms of asset allocation
- Based on a theory that in the long-term, the market will outperform any single investment, so index funds seek to match the risk and return of the market
- Highly transparent as indices are pre-defined, investors know the sector, companies and proportion in which their money will be invested.
As mentioned earlier, investors are not happy to pay higher charges for losses and, hence choosing a passive investment. Seeing this change, several fund houses launched index funds. Motilal Oswal Mutual Fund has recently launched 4 index funds that will replicate Nifty indices subject to a tracking error.
- Motilal Oswal Nifty 500 Fund (MOFNIFTY500)
- Motilal Oswal Nifty Bank Index Fund (MOFNIFTYBANK)
- Motilal Oswal Nifty Midcap 150 Index Fund (MOFMIDCAP)
- Motilal Oswal Nifty Smallcap 250 Index Fund (MOFSMALLCAP)
Mr Pratik Oswal, Head of passive funds, Motilal Oswal AMC, explained the rationale behind launching these index funds in an interview taken by a representative of ETMutualFunds.com.
“We see huge opportunities in the passive investment space. I think, over time, a lot of customers will move to passive because of various reasons. In India, the supply of passive is very less right now. Our idea to launch four passive schemes is to create building blocks for people to do asset allocation. Basically, if I had to launch one scheme at a time, that would look like more of a selling thing. But I had to launch four schemes together because I know not everyone should buy same. They should have a choice to suit their risk profile.
For instance, someone who is risk-averse might prefer Nifty 500 fund, whereas someone who is more risk-loving or those who want to take advantage of some of the valuations in the market today might go for midcap or a small-cap fund.”
Further, he even presented his views about index funds, “I think the reason why index funds are great is that they are extremely democratic, stocks which will do well will get a higher weightage overtime and stocks which do not do well will get kicked out of the index. And, it is a very good long-term investment. For instance, if you had to invest for your retirement, it is very hard to choose a fund manager today because funds go down, fund managers change. So, for long term investments, index funds make more sense.
I see a lot more allocation happening in the passive space in the next five years. A lot of investors want these sorts of products, but they don’t have access to them because not a lot of AMCs want to get into this space. Our idea is to be customer-centric.”
Mr Pratik even pointed out that the investors do not understand the difference between active and passive and the investor’s mindset. “Also, a lot of investors in our country don’t really understand what active and passive is. They do not know what outperformance is, alpha, beta is. I would say 98 per cent of the investors in India just wants to outperform bank fixed deposit. I am providing a vehicle where they can do that at a very low cost.
Also, I think managing the psychology of investors here is very difficult because people do not respond well to underperformance. You would ideally sell your underperforming investment to buy outperforming investment and then you will do it again. But in case of passive funds, as they never underperform, there is no reason to sell them. So, the stickiness of passive funds is much higher than actively managed funds.”
Finally, he spoke about each fund’s suitability, “The whole point of launching four funds is to give people an option
and to help them to identify which one works for them. For a first-time
investor or someone who wants a very low risk and high diversification, Nifty
500 Fund is absolutely phenomenal. There are two choices- Nifty 50 and Nifty
500 – if you are looking at large-cap stocks. Nifty 500 has the stability of a
large-cap index. Around 80 per cent of the money in index is in large-cap
stocks, and 20 per cent in mid-cap and small-cap stocks. So, you have the stability of a large-cap and growth of a mid and
small-cap. It is the only multi-cap index fund in India.
Nifty Bank Index is a pure sectoral fund. Bank index has grown the most. It is
one of the highest performing indices in our country. But it also comes with a
lot of risks since it is very volatile. But if someone who wants to buy the
banking industry, this is a good option.
A small-cap 250 is quite unique. It is the only pure small-cap fund in the country. Ideally if you think, today might not be the right time to launch an NFO because of how poor the market is but if you look at it from valuation perspective, I believe it is great to buy small and mid-cap. An investor should also have the required risk appetite.
Fourth is mid-cap index fund. Anyone who wants to play with valuations and growth, mid-cap fund is great. Seven out of 10 fastest companies in India have come from the mid-cap index. And if you want to play the mid-caps going large caps, you may invest in it.”
Investment strategy: As per the investment strategy, each of the funds will follow a passive investment strategy and invests in stocks in a proportion that is as close as possible to the weightages of these stocks present in the respective index.
The fund manager, Mr Swapnil Mayekar will not make any judgments about the investment merit of index nor will it attempt to apply any economic, financial or market analysis. It would revolve around reducing the tracking error to the least possible through regular rebalancing of the portfolio, considering the change in weights of stocks in the indices as well as the incremental collections /redemptions from the Scheme.
Additional Information:
New Fund Offer opens on August 19, 2019
New Fund Offer Closes on August 30, 2019
Min. Investment: Rs 500 and of Re 1 thereafter.
Exit load: 1% applicable if redeemed before 3 months from the date of purchase.
Plans: Regular and Direct under the growth option.
Outlook:
Index funds are good investment avenues for mature markets like the US, where in to generate an Alpha is not possible as it has reached its stagnation. But for markets like India, there are opportunities for value buying as government initiatives, like Make in India do provide room for various companies for growth and development.
Besides, in terms of performance, actively managed Large-cap funds, Large & mid-cap funds and multi-cap funds is better as compared to passive index funds, despite the short-term volatility.
| Absolute returns (%) | CAGR (%) | |||||
| 3 Month Return | 6 Month Return | 1 Year Return | 3 Year Return | 5 Year Return | 10 Year Return | |
| Index Funds | -29.6 | -7.6 | -14.9 | 3.8 | 5.4 | 15.1 |
| Large & Mid Cap | -24.8 | 0.5 | -10.3 | 5.9 | 8.7 | 20.6 |
| Large Cap Fund | -25.0 | 1.8 | -6.8 | 6.0 | 7.4 | 16.7 |
| Multi Cap Fund | -28.0 | -1.2 | -11.6 | 5.3 | 7.8 | 20.5 |
(Data as on 26-Aug-2019)
(Source: ACE MF)
[Read: Best SIPs To Invest in 2019]
