The big advantages of passive investment strategy are low expense ratio and unemotional investing, which takes away the behavioral biases of the fund managers
Motilal Oswal Asset Management Company (AMC) on Thursday announced the launched two new fund offers (NFOs) — Motilal Oswal Asset Allocation Passive Fund of Fund (FoF)–Aggressive and Motilal Oswal Asset Allocation Passive FoF–Conservative. The NFOs will open on 19 February and will stay open till 5 March.
The asset allocation patterns of the funds are domestic equity (Nifty 500), international equity (S&P 500), fixed income (five-year G-Sec) and commodity (gold). Under the aggressive FoF, equity exposure will be capped at 50%, while it will be a maximum of 30% in the conservative fund. The debt allocation will be capped at 20% in aggressive and 50% in conservative.
The indicative asset allocation pattern of the funds is as follows:
“In an environment where equity (domestic and international) is at all-time highs, debt yields at lows and gold being the highest performing asset class in 2020, we believe a multi-asset solution is a low-risk way of deploying capital. These funds are low-cost and deliver good returns in most market conditions," said Pratik Oswal, head, passive funds, Motilal Oswal AMC, which manages over ₹6,100 crore in passive funds.
“World over, passive funds have been the chosen funds over the past couple of years and that strategy is also catching up in India now. It can be a decent strategy for investors who don’t know how to allocate their investments," said Mrin Agarwal, founder, Finsafe India Pvt. Ltd, and co-founder of Womantra.
The big advantages of passive investment strategy are low expense ratio and unemotional investing, which takes away the behavioral biases of the fund managers.
According to Motilal Oswal AMC, the direct plans will have an expense ratio of 5 basis points (bps), but it doesn’t include the expense ratio for underlying funds, which will be in the range of 30-40 bps.
Tarun Birani, founder, TBNG Capital, a Sebi registered investment advisor, who is very positive on passive strategies, says that in the western world as well, the trend towards passive investing is gaining a lot of momentum.
“In the recent rally in India, the market grew by 80-85%, but many fund managers have not performed to that level. So if one can participate in the rally in a low-cost manner, it will be one of the best ways. Also, on the large-cap side, 80% of funds have underperformed the benchmark. That is again giving a lot of confidence that any strategy which is a passive-oriented theme should do well for long-term investors," said Birani.
He also suggested that passive investment strategies should be part of the core asset allocation.
However, investors shouldn’t get into passive funds just because of their low-cost as they also need to see and evaluate what works better for them and then make a decision.
From the context of tax implications, unlike equity taxation, both Motilal Oswal AMC’s FoFs will be taxed as debt instruments.
Any interest earned on debt funds that are held for more than three years is counted under long-term capital gain. The applicable tax rate, in this case, is 20% with indexation plus 3% cess, which comes to 20.90%. For holding periods less than 3 years, gains are taxed at your slab rate.
“I still think there is space for active fund management, and you should have a good blend of active and passive funds in your portfolio," added Agarwal.