NFO review: Motilal Oswal S&P 500 Index Fund offers diversified exposure to US stocks post COVID 19 crash

Motilal Oswal AMC is launching India’s first open ended scheme tracking the S&P 500 index of US

Kumar Shankar Roy Apr 2, 2020

US equity marketsGeographical diversification is an oft-used excuse given by many investors to invest in international assets. The logic provided is that keeping investments in stocks exposed to different economies limits overall portfolio risk, while opening up your portfolio to enjoy potential returns from sources that are not available in your home country. Even though there are ways to buy directly US stocks via fintech platforms, selecting which stocks to buy is always a big problem. Mutual funds have a better solution since they offer over two dozen schemes that let you buy a portfolio of overseas stocks as per the fund house’s selection.

In order to cater to the growing interest in US stocks, Motilal Oswal AMC is launching a new overseas stock fund called the Motilal Oswal S&P 500 Index Fund. The new fund offer (NFO) opens for subscription on April 14. We will discuss in detail if your investment portfolio needs Motilal Oswal S&P 500 Index Fund. Read on.

What are your existing international fund options

For a mutual fund investor, there are different choices to consider when somebody thinks of geographical diversification through an international mutual fund. Every country or a group of countries or a theme in a country, or a global theme brings something to the table for you as an investor. There are 7-8 funds that offer exposure to US-listed stocks. There are over a dozen schemes that offer a more wholesome global portfolio. There are some schemes that offer exposure to European companies, country-specific funds offer a gateway to invest in China, Japan, Brazil etc.

Typically, investors have four routes to play international funds: 1. Exchange traded funds (ETF), 2. Index Fund, 3. Actively Managed Fund, and 4. Fund of Funds (FoF). In the FoF, the Indian fund acts as a feeder to a different fund.

Why invest in US market

There are four main reasons why anybody would want to choose to invest in the US stocks market. One, the US has the world’s largest economy (GDP) and also the largest equity market. Two, the US is home to the most innovative and efficient companies in the world. Three, there is a very low correlation between US and Indian equity markets. Fourth, the US is a consumption-based economy.

What are your existing US fund options?

We will assume that you have made up your mind in terms of wanting exposure to US stocks through the mutual fund route.

At the moment, you have quite a few existing options to choose from: Franklin Feeder Franklin US Opportunities (this is a fund of funds), ICICI Pru US Bluechip Equity Fund, Motilal Oswal NASDAQ 100 ETF (an exchange-traded fund that tracks the NASDAQ 100 index), Motilal Oswal Nasdaq 100 FOF (a fund of funds that feeds your investment into the NASDAQ 100 ETF, DSP US Flexible Equity (a fund of funds), Nippon India US Equity Opportunities, Edelweiss US Value Equity Offshore (a value-oriented fund of funds), and Edelweiss US Technology Equity (a tech stocks oriented fund of funds).

Motilal Oswal S&P 500 Index Fund offers a smart way to take diversified exposure to US stocks. This could be a great time to buy US stocks because of the Black Swan event i.e. Coronavirus pandemic triggered market crash. It may be a buying opportunity for long term investors.

Why S&P 500 Index

The Motilal Oswal S&P 500 Index Fund is not an actively managed fund. It will not have a fund manager who will choose US stocks to invest in. The fund will aim to copy the S&P 500 Index. The S&P 500 is one of the premier benchmarks for the US stock market’s performance. Think of it as the BSE 500 or NSE 500 index.

The S&P 500 index contains stocks of the 500 leading companies in the US. It is widely regarded as the best single gauge of largecap US equities. The index is designed to measure the performance of leading 500 companies listed in United States and covers approximately 80% of available market capitalisation.

Copying the S&P 500 index will give the following key benefits: 1. Pure largecap exposure (this is unlike in the BSE 500 or NSE 500 who are more of a multicap index), 2. Global exposure (in 2018 more than 40% of the sales of S&P 500 constituents were reported from foreign countries), 3. It will act as a dollar hedge for Indian investors (given that the Indian rupee depreciates by 2.5% annually) and 4. Reduce portfolio volatility (thanks to very low correlation with Indian equity market).

S&P 500 index

To know more about the S&P 500 Index, click here.

Why S&P 500 Index now

The timing of entry and exit matters. Historically the S&P 500 traded at multiples that were elevated relative to long term average. After recent correction, it may have arrived at an attractive valuation of 16-17 times.

Due to the correction in stock prices, the S&P 500 dividend yield is at a 5-year high and well above the historical average.

How S&P 500 is different from NASDAQ 100

The S&P 500 is a broad market index compared to NASDAQ 100, which is a technology-heavy index. If you feel the NASDAQ 100 index is your thing, you can invest in Motilal Oswal NASDAQ 100 ETF or Motilal Oswal Nasdaq 100 FOF.

The S&P 500 has 500 stocks compared to 100 in the NASDAQ 100. Various studies have, however, shown that a higher number of stocks is not necessarily an optimal solution. Do note though that the top weight sector in both indices is IT (Information Technology), but half of NASDAQ 100 is in IT while only a quarter of S&P 500 is in IT.

The S&P 500 is a pure largecap exposure compared to NASDAQ 100’s large, mid/smallcap exposure.

How S&P 500 Index fund will be taxed

The S&P 500 Index Fund will get the treatment of a debt fund. All international funds are treated as debt funds in the Indian taxation system.

This means Long term capital gains (LTCG) tax is 20% (plus surcharge, if applicable and cess) with indexation if units are sold after holding them for more than 36 months. Short term capital gains (STCG) tax is at the investor’s income tax slab rate if units are sold before holding them for 36 months.

Fund details

Benchmark – S&P 500 TR Index

Fund Manager – Herin Visaria, and Abhiroop Mukherjee (debt component)

Total Expense Ratio – 0.5% (direct) and 1.0% (regular). The costs look extremely competitive and in line with Motilal Oswal NASDAQ 100 ETF or the FoF.

Exit Load – 1% for 3 months from the date of investment

RupeeIQ Take

It is well-known that investors gain when they combine assets that are less/not correlated. This helps reduce portfolio volatility, thereby improving risk-adjusted returns. If you consider US and Indian markets to be less/not correlated, investing in a US fund makes ample sense.

Any investment strategy that is dependent on one sector is much less optimal than a strategy where the sector dependence is low. Based on these merits, the Motilal Oswal S&P 500 Index Fund seems a worthy investment candidate.

Since this is an index fund, do not expect very quick decisions on individual stocks. The index runs on a set of rules. When companies don’t meet those rules, they are shunted out and replacements come in. This apparent lack of flexibility is balanced by low costs. Actively managed US funds could cost over 2% in expense ratio.

The advantage of an index fund, not just Motilal Oswal S&P 500 Index Fund, is that you are assured of replicating the index. Whatever will be the index return, an index fund will deliver the closest return possible.


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.

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