December 1, 2019

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

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

Due to the popularity of Index Funds and their low cost, many AMCs now launching series of Index Funds. One such Index NFO is the Motilal Oswal Nifty Next 50 Index Fund.

What is the Nifty Next 50 Index?

As per the definition of the Nifty Index Broad Market classification, this Nifty Next 50 Index constitutes the large-cap Index only.

The index has a base date of November 03, 1996 and a base value of 1000. The Index aims to measure the performance of 50 large-cap companies after the top 50 companies forming part of the NIFTY 50. The selection of securities and weights are based on free-float market capitalization. The NIFTY Next 50 Index represents about 11.9% of the free-float market capitalization of the stocks listed on NSE as on March 31, 2017. You can read more on this at this NIFTY information. Let me explain the same NSE Chart.

Nifty Broad Market Classification

But do you feel Nifty Next 50 is Large Cap? Hold on, Nifty Next 50 constitutes a higher risk and you must not consider this as a pure large-cap fund. Refer to THIS Pattu’s post in this regard. Hence, better to consider this NN50 as a Mid Cap Fund with respect to RISK and RETURN.

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

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 Next 50 as of December 1st 2019.

Nifty Next 50 Index Funds in India as on Dec 2019

Hence, always compare the existing funds expense ratio and then make a decision. Because the expense ratio always matters a lot when you are investing.

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. You can read more on this at NIFTY.

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.

# Do remember that Nifty Next 50 Index is highly volatile in nature. Hence, never consider this as a large-cap index and take your decision.

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