Home / Money / Personal Finance /  Motilal Oswal S&P 500 Index Fund - Should you subscribe?

MUMBAI: Indian investors will soon get a chance to invest in the principal index of the world’s largest economy, the S&P 500. This index covers about 80% of market capitalisation of listed stocks on US exchanges.

Motilal Oswal Asset Management Company is launching an index fund that tracks the S&P 500. A large number of companies that operate in India and are used by Indian consumers are part of the S&P 500. These include Amazon, The Coca Cola Company, McDonald’s Corporation, The Starbucks Coffee Company and Nike Inc.

The fund house had launched an Exchange Traded Fund (ETF) tracking the NASDAQ in March 2011 making this its second offering tracking US markets.

The New Fund Offer (NFO) for the Motilal Oswal S&P 500 Index Fund will run from 15 to 23 April and being open ended, it will be available for subscription thereafter as well.

The S&P 500 is a diversified index, like India's Nifty 50.

The coverage of the S&P 500 at 80% of listed market cap is even broader than the Nifty 50, which covers 67% of listed stocks. It is more akin to the Nifty 100 which covers 77% of free float market cap.

The fund's largest sector is information technology which occupies a 24.4% weight in the index. This is followed by healthcare, financials and communications. The Nifty 100, by contrast, is more concentrated, its largest sector financials, occupies a 36% weight.

The S&P 500 Index covers all 11 sectors in the US compared with just eight covered by the NASDAQ. The third major US index, the Dow Jones Industrial average only covers 30 listed stocks and excludes transportation and utilities.

The S&P 500 has given returns of 12.7% and 17.8% CAGR in rupee terms over the past five and 10 years respectively (as of 19 March, 2020). This compares favourably against the 6.3% and 9.6% delivered by the Nifty 50. The Nifty 100 has given similar returns to the Nifty 50.

In terms of valuation, the S&P 500 trades below its 10-year moving average PE ratio and above its 10year moving average dividend yield, indicating favourable valuations relative to its own history. As per the AMC presentation, the Total Expense Ratio (TER) for the S&P 500 index fund will be 1% for the regular plan and 0.5% in the direct plan. The minimum investment amount is 500.

The Motilal Oswal S&P 500 Index Fund is a passive fund which will seek to replicate S&P 500 index returns rather than beat the index. Passive funds typically have lower expense ratios, but they also give up the idea of outperformance against the index.

There are actively managed Indian mutual funds investing in the US market such as Franklin India Feeder - Franklin US Opportunities Fund, and DSP US Flexible Equity Fund.

The Motilal Oswal S&P 500 Index Fund will be denominated in rupees although it will invest in US dollar assets. Hence, you will be affected by rupee-dollar movements. Rupee depreciation against the dollar will benefit you and vice versa. Investment in the fund will not eat into your foreign investment limit $250,000 set by the Reserve Bank of India under the liberalised remittance scheme (LRS). The returns of the fund will be taxed in the manner of Indian debt funds - slab rate for holding periods up to 3 years and 20% with indexation benefit for longer holding periods.

In a presentation to investors, Motilal Oswal AMC outlined several reasons for investing in the fund. Three principal reasons, pass muster.

First, the S&P 500 (in rupee terms) has a low level of correlation with India’s Nifty 50 Index, just 0.147. Hence, an investor whose core portfolio is in Indian markets will get diversification benefits by investing in the S&P 500 Index Fund. Diversifying within market segments in India does not get this result. For example, the Nifty 50 and the Nifty Midcap 50 have a 5 year correlation of 0.86.

Second, Motilal Oswal AMC pointed out because S&P earnings are denominated in dollar terms, Indian investors benefit from rupee depreciation against the US dollar. From March 1999 to March 2020, the S&P 500 grew 4.9 times in dollar terms and 8.6 times in rupee terms.

Third, the AMC said that although the S&P 500 is a US index, as much as 40% of its sales come from the rest of the world giving its investors a global rather than single country exposure.

Gaurav Awasthi, senior partner, IIFL Wealth, added a few notes of caution.

"Currently Indian markets are cheaper since the US markets are coming off from an extremely strong 10-year bull run while the broad Indian markets were in correction mode for the last couple of years. The Indian market cap to GDP ratio is close to 50 % while for the USA , it is close to 120%," Awasthi said.

In other words, Indian markets are relatively cheaper for investors than US markets. He, however, noted the advantages of the market access given by this fund. “A large diversified index like S & P gives investors in multiple areas where there is no access in the India markets. It also gives global market exposure since close to 40 % of the revenues comes from global markets excluding US. An allocation of 10 % can be done in global markets but it should be done gradually since the global markets are also under stress and extremely volatile," he added.

Feroze Azeez, vice president at Anand Rathi Wealth Management, noted that buying an index fund is better than buying actively managed funds globally. “The rupee weakness can be efficiently hedged during these uncertain economic situations and downgrade risks for India," he added.

If you do not have global diversification, this is a good diversified low-cost product to start with. If you are already invested in international funds, this index offering gives you one more alternative. Global markets are going through significant turmoil on account of covid 19, therefore one should proceed cautiously through SIPs (Systematic Investment Plans) or staggered lump sums. Place around 10-15% of your portfolio in international funds, and higher proportions if you have future expenses abroad such as children's education.

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