Motilal Oswal S&P 500 Index fund is the upcoming new fund offer from Motilal Oswal AMC with the theme of providing international diversification to investment portfolios.
Why International Diversification?
There is an important reason for it. As per World Bank, India has a roughly 3% share of world GDP. It means international diversification is an opportunity to participate in the balance 97% of output in the rest of the world.
Not just that, there is another benefit too. The USD INR depreciation – on an average rupee depreciates against the INR by 4% each year. By investing in US, you add that currency depreciation number to your returns.
To add further, in the past 5 years, the India equity markets struggled. They were extremely volatile leading to the current point where they are at lower single digit returns.
In comparison, US indices delivered upper single digit returns, however, if you take into account the fall in rupee dollar exchange rate, the returns turn double digit.
USA is just an example. I mention returns with the sole purpose of stating a fact that the two markets can behave differently during the same period. In statistics speak, they have little correlation and hence qualify as candidates for diversification.
It is in this context that we evaluate the Motilal Oswal S&P 500 Index Fund NFO.
What is the S&P 500 Index? Is it like our BSE 500 or NSE 500 index?
The S&P 500 Index is one of the bellwether indices in the US along with Dow Jones Industrial Average and Nasdaq 100.
Think of Sensex 30 or Nifty 50 in India, that is what S&P 500 is to US. It has the leading and largest companies listed in the US stock markets.
The Nifty 50 accounts for over 60% of the Stock Market capitalisation in India. The S&P 500 Index accounts for about 80% of the market capitalisation of all US listed stocks.
A key difference between the two is that the S&P 500 is far more diversified that the Nifty or Sensex. See the sector breakup for S&P 500.
What does the break up look like for Nifty or Sensex. Find out for yourself!
As you also realise, BSE 500 or NSE 500 Index in India account for almost the entire Indian Stock market capitalisation. The comparable all market index in US are Russell 3000 and Wilshire 5000.
What will the Motilal Oswal S&P 500 Index Fund do?
This fund is a passive fund. Like any other passive strategy, it will replicate / mirror the S&P 500 Index holdings in exactly the same ratio.
As a mutual fund, it allows you to invest small amounts and take exposure to the underlying index.
The returns will be subject to tracking error, because of delay in rebalancing and costs.
How is it different from the Motilal Oswal Nasdaq 100 fund?
The Nasdaq 100 fund is also a passive fund which replicates / mirrors the Nasdaq 100 Index. The index represents top 100 non financial stocks listed on the Nasdaq.
The Nasdaq 100 is a more technology focused index and steers clear of financial companies.
Given the limited scope, it can be more concentrated too. The individual weightage to stocks can go up to double digits. Apple currently has a 11% allocation in this index, for example.
In contrast, the S&P 500 Index limits the allocation of the largest 5 index constituents to 7%.
The concentration in Nasdaq 100 also results in a higher volatility than the S&P 500 and as some would argue, higher rewards too.
Are there any comparable funds from other AMCs? What is the need for one more international fund focused on US?
Let’s take the second question first. Why US? USA has approx. 23% of the share of world GDP. Not just that, the share of non US income of the S&P 500 companies is at 40%+. It is effectively a world index of sorts.
Having said that, there are several investment options to consider for international diversification offered by other fund houses. Currently, all of them are actively managed funds. Here are a few examples:
- Franklin India Feeder US Opportunities – Fund of Fund
- Franklin India Feeder European Growth Fund of Fund
- DSP US Flexible Equity Fund
- ICICI Prudential US Bluechip Fund
- Nippon India US Equity
- Edelweiss Greater China Equity Off Shore Fund
Some are feeder funds, that is they invest in another fund which invests in the respective country or mandate. It is argued that the structure leads to additional costs and hampers returns.
Other funds invest directly in the identified market. As actively managed funds, they also have higher expenses compared to passive funds.
In contrast, the new offering is a passive, low cost, index fund.
What is the taxation for this fund and international funds in general?
All international funds are treated as debt funds for the purpose of taxation. It means that if you sell your holding within 3 years of purchase, you pay short term capital gains tax as per your tax bracket. However, if you hold for 3 years or more, you are allowed cost indexation and pay only 20% tax on the reduced long term capital gains. (just the way it works with property taxation)
The cost indexation feature for long term capital gains could potentially reduce your tax liability significantly.
There is no track record of the fund. Should one invest in the NFO?
True. The fund does not have a track record. However, it is a unique offering. There is no other comparable passive fund based on the S&P 500 Index in India.
However, we have some facts. The fund house has managed the Nasdaq 100 fund for close to 10 years now. The current expense ratio of the Nasdaq 100 ETF is 0.5%, the FOF wrapper has another 0.1% (these are for direct plans only).
The tracking error (the standard deviation of the difference of the returns from the index and the fund) was at 0.21% in Dec 2019 and 0.13% in Feb 2019. (Source: Fund factsheets)
The expense ratio as communicated by the AMC, for the Motilal Oswal S&P 500 Index Fund is going to be 0.5% for the direct plan (same as the Nasdaq fund). The tracking error is expected to be similar to Nasdaq 100.
All this with a well diversified portfolio of some of the well managed companies makes for a compelling option to add some diversification to your portfolio.
Remember though, you have to also note the requirements of your portfolio to see how much allocation you need to the portfolio for this specific fund or from an international diversification perspective.
You may also have other funds which have international exposure. Take that into account. If you are not sure, work with your advisor to determine the right allocation for you.
It is not necessary to invest at the NFO stage itself. It is an open ended fund, which means that you can invest any time.
Before making your investment, do not forget to go through the fund prospectus and scheme information document in detail. They are available on the fund house’s website and many other online channels.
You should not fall for ‘do a Rs 500 SIP‘ in the fund. Such a small amount does not make any difference to your portfolio, only adds to the bloat.
Stay safe!
how much allocation needed for this fund to my overall portfolio, Currently i have UTI Nifty index and Nifty Next 50 funds are part of my equity portfolio. I am investing 80:20 (N50:NN50) allocation to equity portion.