December 1, 2019

Motilal Oswal Nifty 50 Index Fund NFO – Should you invest?

Motilal Oswal AMC is launching the new fund offer of Motilal Oswal Nifty 50 Index Fund. This fund is available for subscription from 3rd December 2019 to 17th December 2019. Should you invest?

It is now evident that after the recent SEBI Recategorization and Benchmark set as Total Return Index (TER), it is hard for many active large-cap funds to beat the benchmark. Also, Index investing is slowly picking up in India. Considering this as an opportunity one by one AMCs are launching the large-cap and mid-cap index funds.

The upcoming one is by Motilal Oswal AMC.

Motilal Oswal Nifty 50 Index Fund NFO – Should you invest?

Let us see whether we have to jump into and invest in this Motilal Oswal Nifty 50 Index Fund NFO or not?

What is the Nifty 50 Index?

Nifty 50 Index means the first top 50 stocks of the Nifty. To understand in a better way, refer to the below image.

Nifty Broad Market Classification

Many of you may be aware that there are two main reasons to avoid Large Cap Active Funds and they are as below.

a) Due to SEBI Recategorization, there is no room left for Large Cap Active Funds to play and hence they are finding it hard to beat the index.

b) Due to the introduction of TRI (Total Return Index).

As this is the Index Fund benchmarked to Nifty 50 TRI Index, you no need to bother about who is the fund manager or which AMC Fund you are investing. The reason is that Index Funds (irrespective of AMC or who is managing), will have to replicate the Index. Hence, you no need to be attached to the fund manager or AMC.

When you choose any Index Funds. Three things to be considered and they are as below.

1) Expense Ratio

Usually, higher the AUM refers to lower the expenses. Leading to a strict NO towards NFOs expensive compared to the existing Index Funds. Refer to the existing Nifty 50 and Sensex Index Funds as of December 1st 2019.

Nifty 50 and Sensex Index Funds in India as on Dec 2019

Refer to the complete list and expense ratio. Many funds expense ratio is around 0.1%. The expense ratio is not uniform with respect to AUM. For example, LIC Index Fund (Nifty) AUM is 29 Cr. However, the expense ratio is 0.47%. At the same time, Tata Index Fund AUM is just 19 Cr. However, the expense ratio is 0.05%.

Hence, better to wait to invest rather than just jumping into NFO. Do keep one thing that lower expenses lead to higher returns as all funds are tracking the same index.

2) Tracking Error

It is a difference between the fund returns with respect to the Index it is replicating. If a fund you are investing in is claiming to be the Index Fund, then the tracking error should be lower. Lower the tracking error means a better result with respect to Index.

Tracking error usually happens due to below said reasons.

# Any delay experienced in the purchase or sale of shares due to illiquidity of the market, settlement, and realization of sales proceeds and in receiving cash and stock dividends resulting in further delays in reinvesting them.

# Any costs associated with the establishment and running of the scheme including costs on transactions relating to investment, recomposition and other operating costs.

# The Index reflects the prices of shares at the close of business hours. However, the scheme may be able to buy or sell shares at different points of time during the trading session at the then-prevailing prices, which may not correspond to the closing prices.

# Significant changes in the composition of the index may involve the inclusion of new securities in the indices in which event while the scheme will endeavor to balance its portfolio it may take some time to precisely mirror the indices.

# The holding of a cash position and accrued dividend prior to distribution and accrued expenses.

# Dis-investments to meet exits of investors, recurring expenses, etc.

However, from an investor’s point of view, lower the tracking error means better the fund performance. But immediately during the NFO period, you can’t predict this.

3) AUM of the Index Fund

Higher the AUM is always better for Index investors. Lower AUM makes it difficult for the fund manager to manage inflows and outflow and still retain similarity with the index.

Hence, it is always better to choose an Index Fund which has a decent AUM. In fact, higher the AUM better to choose the fund. (Refer THIS Pattu’s Post).

Considering all these aspects, I strongly suggest you to avoid any NFOs in Index space. Instead, let the fund accumulate at least Rs.500 Cr AUM, then after considering the expense ratio and tracking error, we can take a call.

Few points to consider before investing in Index Funds:-

# Index Funds definitely the best choice due to its low cost.

# All Index Funds even though replicate their index. There may be certain pointers to decide which fund to choose like an expense ratio, AUM and tracking error.

# Index Funds definitely remove the AMC and Fund Manager risk. However, market risk is always there.

# Index Funds comes with ZERO downside protection. Hence, it is your asset allocation between debt and equity is what a risk managing tool.

# Media and AMCs advertising Index Funds as if they are BEST FOR RISK AVERSE INVESTORS. But do remember that Index Funds never escape from market risk. Hence, asset allocation should be your mantra irrespective of which category of index funds you choose.

5 Comments

  1. As a new investor like me your views are great eye opener…great work…thank u sir…

    Reply
  2. Blog is good ..It is very use full Thank you for sharing the information

    Reply
  3. VERY USEFUL INFORMATION TO TAKE HEALTHY INVESTMENT DECISIONS

    Reply

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