NFO review: DSP BFSI Next Index Fund, a smart play with a twistAt a time when financial companies have been taking a beating in the stock markets, DSP Mutual Fund is launching a smart beta investment product focused on BFSI sector. The fund christened, DSP BFSI Next Index Fund, will open for subscription from October 22.

Smart beta investing combines both passive as well as active investing strategies, and thus hopes to generate higher returns than a pure index fund. So they mimic smart indices that are custom-built to suit fundamental investors. In this way they avoid market-cap or liquidity based indices that are created merely to copy market activity.

A normal index fund or an exchange-traded fund (ETF) is not a smart beta product. A smart beta investment strategy is designed to add value by strategically choosing, weighting and rebalancing the companies built into an index based upon objective factors.

This launch is significant as smart beta investment products are a relatively new concept and they are not launched so regularly in India.

The DSP BFSI Next Index Fund will follow rule-based investing, and will rely on filters and screens over forecast. The fund’s benchmark is S&P BSE Diversified Financials Revenue Growth Index.

Index construction

As explained to you earlier, a smart beta product will not just mimic an index. The index is custom built. To do this, the index is built by using a variety of fundamental, technical or other filters that help them narrow down constituents. The original index may have 300 stocks, but using the filters and screens the stock universe may get narrowed down to 150 or so. So, how is DSP BFSI Next Index Fund doing the index construction?

Well, there are three key things DSP BFSI Next Index Fund is doing for building its index.

Firstly, it only includes companies with BSE Sector classification Finance to eliminate other sectors from the S&P BSE Diversified Financials Revenue Growth Index.

Secondly, the index is excluded of all stocks with BSE categorisation PSU to make room for a new category of companies like Insurance, AMCs, Diversified Financials etc. that belong to private-sector.

Thirdly and lastly, the index drops the bottom quartile of stocks by Revenue Growth. This serves as a common parameter to evaluate companies at different stages of growth within the sector. Do remember that IPO companies that listed in past 2 years are not subject to the revenue growth rule and are added back to the index after the quartile selection. Also, demerged companies that is any entity demerged in the last two years and which were a part of the index (in either of the last two re-balances) will be included to the portfolio.

As a result of using these tricks, a new index is built.

Weighing scheme: The free-float market capitalisation weighing with maximum stock weight capped at 5%. The maximum stock weight cap is incrementally relaxed by 1% in case the number of stocks available fall below 20 stocks.

Rebalancing: The index is rebalanced on a quarterly basis and reconstituted on a semi-annual basis.

Why BFSI

You may ask why the BFSI part of the S&P BSE Diversified Financials Revenue Growth Index is being used. Well, BFSI stocks have a solid growth track-record and wealth creation potential. But, that is excluding PSUs. PSU BFSI stocks have been bad advertisers of investment for long. Hence, PSUs are being excluded.

Valuations in BFSI stocks have come down. Recent market correction provides a good opportunity to start investing in the private sector piece of BFSI stocks.

As of September 2018, the index is dominated by companies like Bajaj Finance, ICICI Bank, Bajaj Finserv, HDFC Bank, HDFC, Kotak Mahindra Bank, IndusInd Bank and Indiabulls Housing Finance, to name a few.

Expense ratio

The DSP BFSI Next Index Fund is charging 1% or 100 basis points as expense ratio for the regular plan. For direct investors, the expense ratio is 0.50% or 50 basis points.

Peers

Various fund houses in India have rolled out smart beta investment products in India such as Edelweiss, Reliance, ICICI Prudential and Kotak.

NFO period

October 22 to November 5

Fund Manager

Gauri joined DSP Investment Managers Pvt Ltd in January 2017. She is the fund manager of the DSP Equal NIFTY 50 Fund from October 2017 and DSP Liquid ETF from March 2018. Gauri has over 12 years of experience in managing passive funds across various Index Funds and ETFs. Prior to joining DSP, she worked for Goldman Sachs Asset Management India Pvt Ltd (erstwhile Benchmark Asset Management Co. Pvt. Ltd.) who were among the first to conceptualise and launch various equity, debt, commodity and international index funds and ETFs in India.

RupeeIQ take – Smart beta investment products are new to Indian investors. So, as a thumb rule, financially literate and sophisticated investors should go for such products. These products are positioned between the plain-vanilla ETF, index funds on one side and the actively managed equity funds on the other. We like the strategy of the fund to exclude PSUs from the BFSI stock list. Nobody knows what skeletons are in the PSU cupboard, so it’s better to avoid them when in doubt.

Coming to the moot point of this fund, you as an investor have to take a call on whether you need a smart beta BFSI index fund or rely on an actively managed BFSI fund. Most actively managed BFSI funds are these days avoiding PSU stocks, so at a fundamental level, there is some similarity.

Index funds are supposed to be cheap; on that front DSP BFSI Next Index Fund has room for improvement. While nobody is asking DSP BFSI Next Index Fund to charge a pittance like Bharat 22 ETF or what many Sensex/Nifty ETFs and index funds charge, but 100 bps seems a little too much. Edelweiss ETF Nifty Bank charges 12 bps only. Kotak bank ETF charges 21 bps and Reliance ETF Bank BeES charges 22 bps. Maybe the DSP BFSI Next Index Fund will progressively charge a lot lesser as the fund size grows. We hope they do because 100 bps for the regular plan is expensive.

Download Scheme Information Document of DSP BFSI Next Index Fund.

Disclaimer: Please note that investors are requested to consult their financial, tax and other advisors before taking any investment decision.