Motial Oswal Fund is launching a new fund. Let’s review Motilal Oswal S&P 500 Index Fund NFO today. What is an Index Fund? Should you invest in it? Or there are better options? NFO opened on 15th April and closes on 23rd April 2020. That is bit unusual period for launching a new fund. When entire country is in lock-down and even other parts of world in restrictions, Motilal Oswal is trying to launch and sell and new idea. Of course, since this is an open-ended scheme, even if you don’t invest now, it will be open for normal subscription in a week or so. Let us try to understand this new fund and is it suitable for you.
1. Index Fund? What does it mean
Since Motilal Oswal S&P 500 Index Fund is a index fund as name suggests, lets understand what does that mean. Generally you would have seen fund house talking about how fund has performed better than underlying benchmark index. Such funds are called actively managed funds as a team of fund manager tries to use its wits or strategy to select particular stocks to beat the market or index. Say a large cap fund trying to perform better than Nifty or Sensex Index. Fees that fund manager charge are for this purpose – for being smarter than the market and earn returns more than underlying Index. If Nifty performed 12% in a year and your fund performed say 15%, you are okay to pay additional fees to fund manager for the 3% extra returns.
However there is another school of thought which thinks that over a long run, you can not beat market or economy. As there are hundreds of funds to chose from, there is high likelihood of we choosing not so good fund. Fund manager’s strategies work in cyclic manner. So we choose what is performing good as of now. But same fund may under perform in long run of 15-20 years.
People believing in this thought process, recommend what is considered as Passively Managed Fund or Index Fund. Here fund manager is not trying to beat market but is investing and adjusting portfolio in the same weightage as in the in underlying Index. So there is no question of under performing or better performing than index. In long run, except for small tracking error, returns from fund will be more or less in line with underlying Index. You should read and watch content from Varun Malhotra to know more on Index Funds.
In case of this particular fund, Index that is tracked is S&P 500. This index is for top 500 US companies. Considered as one of the oldest index in the world and has good and long track record. You can consider it is equivalent of Sensex for US from historic perspective. Major difference being, here there are 500 stocks in this index as name suggests. So it is much more diversified index.
2. International Fund? What does that mean
Motilal Oswal S&P 500 Index Fund is also an International Fund. So what it means is that this fund will not be investing in Indian Stock Market. So you will not see Reliance, HDFC, ICICI in portfolio of this fund. For us Indians, this is opportunity to invest in stocks of International companies. Anyone willing to buy Google, Microsoft, Johnson and Johnson or facebook shares but don’t want to really go through direct route, can use international fund for the same. This particular fund will be investing in US companies as underlying index is S&P 500 (index of top 500 US stocks).
Just to give some glimpse of where money would get invested, see image below for top 10 stocks of this Index. You can see here complete list of S&P 500 stocks and weightage.
3. Why we need International Fund in portfolio
Mutual fund as a product is unique compared to other instruments as it offers diversification in small amount. Say with just Rs. 500, you can invest in a fund which has more than 25-50 stocks. So you are getting diversification across stocks even with small amount.
Similar to that, international fund offer Geographical and Political diversity. When you invest in an International fund, you are investing money not in India but some other country. This helps in balancing volatility of your portfolio. Corona is exception but otherwise not all countries stocks behave in same manner. In particular year, Indian Stock Market may outperform other countries and in some case that of US or China may outperform us. So overall returns from a geographically diversified portfolio are likely to be more stable and less volatile compared to portfolio with exposure to just one country.
This index ( S&P 500) has shown low correlation with Indian Stock Market. In simple language what it means it wont go up or down in same proportion as Nifty. This is good for hedging of your portfolio against downside due to some event in India.
Also natural calamities like earthquake, floods, drafts etc generally impact one geographical area and companies in other countries may still do well. Situations like say a likely war scenario in one region may impact stock market in that region very badly but impact may not be that bad in other corner of world. So one can consider International funds as hedge against any geopolitical risks in India. You can consider around 10 to 15 % equity allocation to other countries. Something like :
- Say 5 % in US
- And additional 5 % in China
- Remaining 5 % in other emerging markets
4. Risks and returns
Underlying asset is ultimately equity. So equity related risks hold true for this fund as well. However US is a developed country and world’s largest economy (at least for now). So markets there are comparatively matured and stable compared to India. Volatility should be less than Indian stock market. Of course even returns in long run may be less than Indian Stock Market. You can see risk adjusted returns are better in S&P 500 compared to Nifty 500.
Fund portfolio has 500 stocks which is large diversification. It is a well diversified index and so generally less risky compared to concentrated funds with say just 25 stocks.
Passive style – Fund is a passive fund which means fund manager is not going to select stocks but just follow the index. So risk with fund manager taking wrong call does not arise here. Returns would be generally inline with US economy.
INR – USD conversion – We as India investors would invest money in Indian rupees. Motilal Oswal Fund house will get it converted in US dollar for investing in US. When we redeem, it would be converted back to rupees. So currency rate fluctuation would impact returns. If rupee depreciates against US dollar, investors would benefit and if rupee appreciates, we would get less returns. Lets take an example to understand.
- Lets say 1 USD is 76 Rupee as of today when you invest your money.
- Say you invest Rs 76,000 in this fund. That would get converted in USD 1,000 while investing.
- Say, in a year, valuation of fund raises by 10% – Your investment valuation become USD 1,100 (increase of 10% over 1,000).
- Let’s say you decide to redeem now for some reason.
- But let’s say by then INR depreciates against Dollar and becomes 80 at that time.
- You would get 1,100 * 80 = Rs. 88,000 rupees. So though actual US equity rose by only 10%, you would get almost 15.7% as your 76,000 became 88,000.
- Or reverse. Let’s say rupee appreciates against dollar and becomes 72 at that time.
- You would get 1,100 * 72 = Rs. 79,200 rupees. So though actual US equity rose by 10%, you would get only 4.2% as your 76,000 became 79,200.
- But let’s say by then INR depreciates against Dollar and becomes 80 at that time.
- Below image would show actual impact of rupee appreciation and depreciation on returns in past
So you need to consider how you foresee US economy as well as USD to INR currency fluctuation for considering risks and returns
In general for any NFO, you can not gauge performance as no past history is available. However in this case, we know all the money is going to be invested as per existing index. We can gauge expected returns based on past performance. Above image from scheme presentation may help give you idea.
5. People behind Motilal Oswal S&P 500 Index Fund
This is not a actively managed equity fund where fund manager decides stock selection. So fund manager is not a critical here. So will need not spend time on this. Job of fund manager is only to track investments as per underlying index.
Fund Manager – Mr. Herin Visaria and for Debt component – Mr. Abhiroop Mukherjee
6. USP of Motilal Oswal S&P 500 Index Fund
This is first Indian fund to target S&P 500 Index. S&P 500 is a well known index with good historic data. You can get exposure with SIP of as low as 500 rupee. There are other funds in India giving opportunity to invest in US companies but not many in space of Passive funds. If you are interested in Passively managed US equity fund, this could offer you that opportunity. Opportunity to get exposure to US stocks in a simple way. Some key features of fund :
- Investment in top 500 US companies
- Exposure to world’s top economy – US currently has almost 1/4 of world’s GDP – 8 times that of India
- S&P 500 index is considered by many as reflection of US economy – your money would grow in line with economy
- Top 4 passive funds by Assets Under Management are tracking this index
- Many experts recommend S&P 500 for retail investors
7. Who are peers of Motilal Oswal S&P 500 Index Fund
I think closest comparison for this fund would be from same fund house which is Motilal Oswal Nasdaq 100 FOF which internally invests in Motilal Oswal NASDAQ 100 Exchange Traded Fund. If we see performance of later over 1,3,5 & 7 years, we see returns are 27%, 24%, 19% and 23% which is very impressive despite of recent down turn. But nasdaq fund is more technology heavy (46% weighatge ) and S&P fund is more diversified (technology less than 25%).
If you want international / US exposure but actively managed fund then Franklin India Feeder Franklin US Opportunities Fund too is a good option with approximate returns of 1,3, 5 & 7 years as 15%, 20%, 13% and 17% respectively.
8. Risk factors
SEBI has given it High Risk rating as per their standard risk guidelines. Reasons being :
- This is ultimately an equity fund. Equity class is considered riskier compared to other assets classes due to likely volatility
- It is international fund and is subject to country specific regulations & political as well as geographical situation
- Currency impact
For tax purpose, this fund is treated like an debt fund as investment is not in Indian companies. Long term capital gains will be taxed 20% with Indexation (if held for more than 3 year) or Short term capital gains will be taxed as per your income tax slab (if held for less than 3 years)
Please consult your CA for current tax liability and rules since there could be change when you read the article.
Before you read conclusion – a disclaimer. Please note – I am not advising you on any financial decisions and you should do your own research and consult your financial advisor before making any financial decision. Please treat article as my personal view only. Also note that personally I was invested in Franklin India Feeder Franklin US Opportunities Fund before Corona crisis which is a peer for this fund.
I personally feel international funds are good way of getting geographical diversification. We should invest some at least a part of our portfolio in other countries. US and China are two big economies as well as super powers. Investing in these two countries (in this case only US) should give required diversification to our portfolio. So while investing in these funds, we should not just go by returns.
In my personal opinion (not advice), current situation however is not good to start investing abroad. At least for lumpsum investment. There is too much of uncertainly across globe. We have little control or influence on policy makers in US. Due to Corona related situation, there is lot of speculation around possible trade conflicts between US and China in near future. We need to wait and watch. Geopolitical situation in US is not best at this time. Also in recent month, rupee has deprecated a lot against dollar and if it bounces back post normalcy, it will negatively impact returns.
Once situation is little clear and stability and normalcy starts returning back, one can consider this fund for geographical diversity.
Another tax efficient option to get similar diversification is Parag Parikh Long Term Equity Fund. This fund smartly invests 65-70% in Indian stocks and rest in top international stocks. This method qualifies it for better tax treatment. Also investment in International stocks is direct and not via a fund. So this is cheaper from expense perspective. But you need to check the portfolio to see if it suits your risk profile as it has habit of taking aggressive and concentrated positions.
You can see presentation from fund house here.
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