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Motilal Oswal Nifty 500 will track the 500 largest listed companies by market capitalization and cover about 96% of India’s total market capitalization. (Photo: iStockphoto)
Motilal Oswal Nifty 500 will track the 500 largest listed companies by market capitalization and cover about 96% of India’s total market capitalization. (Photo: iStockphoto)

Motilal Oswal MF opens door to passive investing in the small and midcap space

  • The New Fund Offer of these funds will open on 19 August and close on 30 August
  • Being open ended funds, they will be open for subscription and redemption thereafter

Mumbai: Motilal Oswal Asset Management Company Ltd. is set to launch four index funds tracking the Nifty 500, Bank Nifty, Nifty Midcap 150 and Nifty Smallcap 250. Three of these funds – Nifty 500, Nifty Midcap 150 and Nifty Smallcap 250 largely or wholly cover India’s mid and small cap listed space, giving investors a passive option in an arena dominated by actively managed mutual funds. Passive funds are low cost and not dependent on fund manager skill as they simply track the index in which they invest in. The New Fund Offer (NFO) of these funds will open on 19 August and close on 30 August. Being open ended funds, they will be open for subscription and redemption thereafter.

So what are these funds going to invest in? Let's look at the three diversified funds first. The Motilal Oswal Nifty Midcap 150 Index Fund will track the 101st largest to the 250th largest listed companies in India and the Motilal Oswal Nifty Smallcap 250 will track the 251st to 500th largest companies. The Motilal Oswal Nifty 500 will track the 500 largest listed companies by market capitalization and cover about 96% of India’s total market capitalization. As of 31 July 2019, the Nifty 500 has a 5 year return of 9.12% annualized, the Nifty Midcap 150 has a return of 11.24% compared to 8.91% delivered by the benchmark Nifty 50. However in a testament to the recent carnage in small caps, Nifty Smallcap 250 has a 5 return of just 4.93%. The fourth fund is a sector fund which will track the Bank Nifty. This index has a 5 year return of 14.32%. However investors should note that sector funds are extremely risky as sectors rotate in and out of fashion.

The key question with the launch of these index funds is – given the many actively managed mid cap and small cap funds in India, is there a need to go passive? The S&P Dow Jones SPIVA Report which tracks the performances of active funds against their benchmarks, provides some answers. The 2018 SPIVA Report for India says just 36% of actively managed large cap funds outperformed their benchmarks over a 10 year period. This increased to 42% for a 5 year period but then dropped to 9% for 3 years and just 8% for a 1 year period. In case of mid/small caps the percentage outperforming over 10, 5, 3 and 1 year periods is 45%, 60%, 43% and 74% respectively. However if you look at the numbers across the board, the index seems to outperform most of the time, especially over the long term. Some experts have raised counter-points to this line of thinking.

“If you look closely at the data many funds are under performing their benchmarks by a small fraction only. Also if you calculate the underperformance by weighting the funds by size rather than just counting underperformers, you will see that a very small fraction of AUM is underperforming," said Vijai Mantri, Chief Investment Officer and Co-Promoter JRL Money.

The second question to be answered is why Motilal? Are there alternative better options? There are a few Exchange Traded Funds (ETFs) such as Reliance ETF Nifty Midcap 150, ICICI Prudential Midcap Select ETF and Motilal Oswal’s own Midcap 100 ETF. However exchange traded funds require demat and trading accounts and have poor liquidity. You also cannot easily automate SIPs (Systematic Investment Plans) in them, like ordinary mutual funds. All these disadvantages are not there in index funds and this makes the Motilal Oswal Index Funds a unique proposition. That said, it may not take very long for other Asset Management Companies to launch index funds in this space and the field would once again be thrown wide open.

Another question that investors should ask is whether index funds can easily buy and sell very small companies considering the low traded volumes in these companies? “The smallest companies will have a very small weight in the index, minimizing the impact of buying and selling them by the index fund," said Pratik Oswal, head – Passive Fund Business, Motilal Oswal AMC.

“Unlike actively managed mid and small cap funds which can hold up to 35% of their corpus in large cap stocks, the index fund will hold almost the entire portfolio in the relevant index. This will make it more true to label," he added. What about Motilal’s own actively managed funds? Is the fund house signaling a wholesale shift to passive products? “The debate is not really between active and passive. It’s about investor preferences. Investors who are able to find great fund managers and stick to them will prefer active funds over passive. However some set of customers just want to outperform FDs at a low cost. The Nifty 500 fund which covers over 95% of the listed market cap is a great option for first time investors," Oswal added.

Mint Take

The average actively managed mutual fund whether large, mid or small is undperforming the index it is benchmarked against, as the SPIVA report shows, especially over long time periods. A good advisor or research can get you a good fund which will do better than the index. However unless you have that kind of confidence in your advisor/research, passive index funds are a great option. So far, there were few options for passive funds in the mid and small cap space. The Motilal initiative has flung that door wide open.

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