Motilal Oswal S&P 500 Index Fund NFO – Should you invest?

Motilal Oswal S&P 500 index fund NFO is launching today for subscription. There is a huge noise around this fund. The reason is that this is an Index Fund and it is INTERNATIONAL Fund. But should you invest?

In India, Index Funds are gaining popularity and I am also one among them to recommend to all my clients. In fact, I already have written my recommendation on my yearly article about my fund choices at “Top 10 Best SIP Mutual Funds to invest in India in 2020“.

There was a huge demand for an international fund in India. Because we all wish to have our investment diversified across the globe also. Hence, considering this trend, Motilal Oswal launching the new fund offer which will track the oldest Index S&P 500 Index.

Motilal Oswal S&P 500 index fund is an index fund that invests in the companies that are part of the S&P 500 Index (US) in the same weightage as in the index. The objective of this fund is to seek investment return corresponds to (before fees & expenses) the performance of the S&P 500 Index (US), subject to tracking error.

What is S&P 500 Index?

Before discussing about this fund, let us first understand the S&P 500 Index.

It was created in 1957, the index is one of the oldest indexes with over a 60-year live track record. The S&P 500 was the first US market-cap-weighted stock market index. Today, it’s the basis of many listed and over-the-counter investment instruments.

The S&P 500 is a proxy for the US equity market, and it is the only stock market benchmark serving as an economic indicator in The Conference Board Leading Economic Index. It has stood for US stock market performance in that context since 1968.

The S&P 500® index includes 500 leading companies that are diversified across all 11 Sectors. The index covers approximately 82% of available market capitalization that are listed on US Stock Exchanges.

The index is regarded as the best single gauge of large-cap US equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total making it the largest and most widely traded index in the world. For more information on the S&P 500 Index (click here).

The current top holdings of the Index are as below.

Microsoft Corp5.0%Information Technology
Apple Inc.4.7%Information Technology Inc3.2%Consumer Discretionary
Facebook Inc A1.9%Communication Services
Berkshire Hathaway B1.6%Financials
Alphabet Inc A1.6%Communication Services
Alphabet Inc C1.6%Communication Services
JP Morgan Chase & Co1.5%Financials
Johnson & Johnson1.4%Health Care
Visa Inc A1.3%Information Technology

This much understanding about S&P 500 Index.

What is Motilal Oswal S&P 500 Index Fund?

Motilal Oswal S&P 500 index fund is an index fund that invests in the companies that are part of the S&P 500 Index (US) in the same weightage as in the index. The objective of this fund is to seek investment return corresponds to (before fees & expenses) the performance of the S&P 500 Index (US), subject to tracking error.

What is an Index Fund?

An index fund is a type of mutual fund which constructs its portfolio by tracking the composition of a standard market index such as the Nifty 50 or the Sensex. The fund not only invests in stocks that constitute the benchmark index but also the same proportion.

For example – a rise of 1% in the index will lead to a 1% increase in the fund and vice versa. There are numerous indexes (Nifty50, Nifty 500, Nifty Smallcap 150) and many others.

Index Funds are popular mainly for the below reasons:-

  • Low expense
  • For long term Index Funds obviously a better choice.
  • No mad rush to search for BEST Mutual Fund.

Alpha and beta are two of the most important concepts in investing in mutual funds.

Beta represents market returns or benchmark returns. This index funds are built to deliver beta (market) returns.

Alpha represents the return in excess of beta returns. For example if the market/benchmark delivers 8% whereas a fund manager delivers 10%, alpha is 2%.

Every fund manager’s goal is to provide alpha. If he/she fails to deliver alpha, then investors are better off investing in beta products (index funds).

The above points are shared from the Motilal Oswal S&P 500 index fund details. I don’t want to into all those questions or in detail about SID.

Motilal Oswal S&P 500 Index Fund NFO – Should you invest?

Let us now discuss on the main aspect of this post. Should we invest in Motilal Oswal S&P Index Fund NFO?

International LOVE:-

Many of us have a tendency to diversify our investment INTERNATIONALLY. Also, many are running behind this NFO just because it is investing in the US market.

Sadly for many of these investors, INTERNATIONAL=USA. They are unable to understand the basics of investment that even if you NEED international exposure, it should not be a particular country-specific. By investing in USA based funds, are you not creating a concentrated risk in your portfolio?

Many have reason to invest in this particular fund by quoting John Bogle as he is the founder and major force to accept that Index Funds are BEST.

His simple Five-Fund Portfolio is as below:-

Large Cap-50%, Mid Cap-10%, Small Cap-20%, Sector specific-10% and International-10%. However, he again stress and share what is meant by International Fund.

I am quoting what John Bogle said in his famous book “Common Sense on Mutual Funds”.

“While I talked about international as a single asset class, I now believe it has two distinct components: developed markets (Britain, Germany, France, etc.) and emerging markets (Singapore, China, India, Brazil, etc.). In this increasingly globalized economy, I see little reason to invest heavily in the former group and would prefer to emphasize the latter (with its smaller but more rapidly growing base, and of course its higher risk). But I’d still limit the international componenet of the portfolio to no more than 20 percent of the equity position”.

It is now relevant that International does not mean one particular country. It should be in multiple countries to diversify your international exposure.

If we look into this aspect, I never consider this particular fund as my international fund. Because it is country-specific. Hence, don’t believe that by investing in this fund, you are DIVERSIFYING your equity exposure.

Taxation of Motilal Oswal S&P 500 Index Fund

When adopt index investing the primary reason is cost. Whether the cost is because of TER (Total Expense Ratio) or because of tax.

If we consider Motilal Oswal S&P 500 index fund, it is treated for us (Indian investors) as a debt fund. Hence, if your holding period is within 3 years, then the taxation is as per your tax slab (Add a surcharge to it). Suppose you are under 30% tax bracket, then you have to pay the 30% tax on such gain.

However, if you hold it for more than 3 years, then the tax will be 20% with indexation (Add surcharge).

This is a huge differentiator for Indian investors when it comes to the cost of investing. If you are investing in the Indian Index Fund (ETF or Index Mutual Funds), the taxation is as per the current equity taxation rules.

However, if opted this fund, because of your taxation, you may end up in adding more expenses in the form of tax.

Expense Ratio

As per Motilal Oswal claim it is mentioned that it is currently at 0.5%. Even if we consider this as our real and forever expense ratio, then it still costly compared to other Index Funds in India (I am concentrating on Large Cap Index Funds and ETFs).

Do remember that this TER will not permanent. Because we know from past experience that how abruptly Indian Mutual Fund Companies change the TER (within SEBI regulation). Hence, I do not jump into this fund just because the current expense ratio is mentioned as 0.5% (for direct funds).

Tracking Error

When we discuss the Index Fund, the utmost important aspect we have to look for is Tracking Error. The product one-pager mentions this line “Return that corresponds to the performance of S&P 500 Index subject to tracking error”.

Because the fund’s tracking error is utmost important when are choosing the Index Fund.

I will again copy paste the same wordings what they defined in their SID “The Fund Manager would not be able to invest the entire corpus exactly in the same proportion as in the underlying index due to certain factors such as the fees and expenses of the Scheme, corporate actions, cash balance and changes to the underlying index and regulatory restrictions, lack of liquidity which may result in Tracking Error. Hence it may affect AMC’s ability to achieve close correlation with the underlying index of the Scheme. The Scheme’s returns may, therefore, deviate from its underlying index. “Tracking Error” is defined as the standard deviation of the difference between daily returns of the underlying index and the NAV of the Scheme. The Fund Manager would monitor the Tracking Error of the Scheme on an ongoing basis and would seek to minimize the Tracking Error to the maximum extent possible. There can be no assurance
or guarantee that the Scheme will achieve any particular level of Tracking Error relative to the performance of the Underlying Index.”

Tracking error plays an important role while investing in Index Funds. However, we can’t judge this tracking error at the NFO level.

# Size of the Fund

When we invest in Index Funds, the size of the fund also matters to us. Usually, higher the AUM the better for the fund manager to manage the sudden redemption or investment by investors. Hence, even though we don’t have any other such kind of fund, I don’t think we need to just jump into this fund for the sake of our INTERNATIONAL LOVE.

Conclusion:-As I pointed above, for me International means not to a single country-specific. Also, it is premature to judge the fund performance (even though it is an Index Fund) at the NFO level. Hence, I suggest you wait and watch the game rather than BLINDLY jumping into FANCY. I am not discussing here how much should be our international exposure. I am satisfied with my low expensive Indian Index Funds rather than high cost and high taxed international funds.

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10 Responses

  1. Hi Basu Nivesh,

    I have been following your blog and I appreciate your effort to educate retail investors.

    I would appreciate it if you can answer the below question.

    I read in other articles that “if you have future plans to travel to the US or if need to send kids to the US for education, this fund will be helpful”. May I know how this fund will help in that perspective as the transactions are done in India in INR?

    1. Dear Bhaskar,
      The advantage is of dollar appreciation against rupee (if such things happen to like how it happened in the past). However, the track error of this fund is horrific. Hence, better to stay away.

  2. Dear Basavaraj Sir,

    I am an existing investor in Shares & Mutual Funds(SIP), In the given current scenario I request you to suggest me few good shares and Mutual fund SIP’s for Long term investment horizon say 10+years of investment.

  3. Thanks Basu, My queries :
    1.What is the %allocation is for this fund to my portfolio. Please consider i have decided to invest.
    Current portfolio 80% N50 and 20% NN50 index funds for equity portion of overall portfolio.

    2. ” Global Exposure – In 2018, more than 40% of the sales of S&P 500 constituents were
    reported from foreign countries ” – Can we say this fund is diversified globally enough.

    3. As Indian retail investor,do we have any index funds which invest globally (all countries).

    1. Dear Kalai,
      1) Do you need it really?
      2) How? When the business module is different of all those companies, just judging that the business is globally spread and that also around 40% means in what way it diversify?
      3) NO and not required also.
      Tax is a biggest hindrance to such funds along with this tracking error and expense ratio.

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