Index FundsMotilal Oswal Mutual Fund has launched two index funds in the large cap space – Nifty 50 and Nifty Next 50 – to complete the basket of offerings across market capitalisation. RupeeIQ gives you the details. Read on.

New index funds

The two new funds are Motilal Oswal Nifty 50 Index Fund and Motilal Oswal Nifty Next 50 Index Fund. The New Fund Offer (NFO) period has started from 3rd December and will continue till 17th December 2019.

Index Funds are mutual fund schemes that seek to replicate the constituents of their target benchmark index. They are passively managed wherein there is no active stock selection/allocation by the fund manager. The portfolio is rebalanced periodically only when companies enter/exit the index.

Also read: What are index funds? It’s time to make a small allocation

In the backdrop of several actively managed largecap mutual funds failing to beat Sensex or Nifty in the last 12-18 months, index funds have emerged as a definite alternative. They are low-cost, simple to buy and do the job efficiently ie track the index. The Indian stock market benchmarks have seen a highly concentrated rally in the time period mentioned above i.e. only eight to nine stocks of the index are pulling it higher. Actively managed funds who don’t have right allocation to those stocks have struggled.

Take a look below at how largecap funds have struggled against largecap indices in two and three year timeframes

Large cap funds Vs index funds

Benefits of index funds

There are two main benefits of index funds.

Diversification – Index funds track the entire index, hence reducing the impact of decline in value of any one stock or industry, sector.

Since index funds are passively managed, cost are kept relatively low, they provide you with a vehicle that eliminates fund manager risk and therefore the risk of underperforming the benchmark.

Expense ratio – Index funds are extremely cheap. The TER for these two index funds will be as follows:

Motilal Oswal Nifty 50 Index Fund:
Direct Plan: 10 bps
Regular Plan: 50 bps

Motilal Oswal Nifty Next 50 Index Fund:
Direct Plan: 30 bps
Regular Plan: 95 bps

These expense ratios are cheap compared to 200-250 bps expense ratios charged by many regular plans of actively managed funds.

Scheme key details

Index funds don’t have much to do, than just efficiently copy the index. Hence, strategy etc are irrelevant.

The role of the fund manager in an index fund is also very limited. This is because the index fund already has a target portfolio to copy i.e. the index.

Both the funds have an exit load of 1% if redeemed on or before three months from the date of allotment.

There is no exit load if redeemed after three months from the date of allotment.

Why large cap index funds?

Large cap stocks are generally seen to be more stable i.e. they fall less during periods of market turmoil compared to midcap and smallcap stocks.

In this context, large cap index funds may be a better investment choice for less aggressive investors who detest market volatility.

However, do remember that a largecap index fund is only as good as the index it tracks. A largecap index fund cannot take tactical calls and active stock allocation decisions. If the construction of the index has issues, the index fund too will replicate those issues.

RupeeIQ take

Fund managers change and funds close down frequently. An investor who is looking to invest for over 10 years is better suited for index funds. If you have such an investment objective, you should invest in index funds.

Since Motilal Oswal Nifty 50 Index Fund and Motilal Oswal Nifty Next 50 Index Fund are new, there is no track-record in terms of tracking error. In simple words, index funds usually lag the index by an amount. This is okay as long it is within 50-100 bps. Pay attention to the time period during which tracking error is assessed.

Related:

Motilal Oswal MF launches 4 new index funds; suitable for investors seeking low-cost convenient solutions at the cost of alpha

Obit: John Bogle, father of index funds, had biggest impact on mutual funds

Disclaimer: Views expressed here in this article are for general information and reading purposes only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any financial instrument including index funds.

Author
Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.