 "Is it worth investing into Motilal Oswal's recently-launched index funds?")
Motilal Oswal AMC has introduced 12 new fund offerings this year alone, which collectively raised Rs 5,731 crore (excluding Motilal Oswal Digital India Fund ). And now, the fund house seems to have extended this streak with the launch of not one but four new passively managed sectoral and thematic funds.
"Since they are index funds, they will mirror their respective indices, investing in the same companies and proportions. For instance, if Company A holds 5 per cent of the index, the fund will also allocate 5 per cent to it," said Karan Jaiswal of Value Research.
These new funds, which opened for subscription on October 29, 2024, and will remain open until November 6, 2024, offer a fresh opportunity for investors to diversify their portfolios into some high-potential sectors.
What Are the New Funds?
Motilal Oswal’s latest offering focuses on mid- and small-cap companies, providing exposure to four major sectors that are seeing significant growth. The new funds will target:
- Financial Services
- Healthcare
- Information Technology (IT)
- Telecom and Consumption
These are sectoral and thematic funds, meaning they will primarily invest in companies that belong to these specific industries. Unlike broad-market index funds, these funds focus on particular themes that might be expected to perform well based on market trends, growth potential, or changing economic dynamics.
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The passively managed nature of the funds means they aim to track the performance of the respective sector or index, rather than relying on active fund managers to select stocks. This usually leads to lower management costs, making the funds more affordable for investors.
Below are they key details of each index fund:
1. Fund Name: Motilal Oswal Nifty MidSmall Financial Services Index Fund
Category: Sectoral (Index)
Benchmark: Nifty MidSmall Financial Services TRI
Portfolio Composition:
The index tracks a total of 30 stocks, which is significantly more than the 20 stocks in the Nifty Financial Services Index. This larger stock universe offers a broader exposure to mid- and small-cap companies within the financial services sector.
Top Holdings: The top 10 stocks in the index account for nearly 50% of the total portfolio weight, offering investors a concentrated view of the leading players in this space.
Index Overlap: The Nifty MidSmall Financial Services Index and the Nifty Financial Services Index do not overlap in their top holdings, offering a unique mix of companies in the financial services sector.
How Has the Index Performed in the Past?
Investors considering this fund will want to understand how the index has performed historically, especially compared to other relevant benchmarks.
Over the past five years, the Nifty MidSmall Financial Services Index has underperformed the Nifty 400 TRI on a five-year daily rolling basis, as per data analysed by Value Research. This indicates that the index has lagged behind a broader market benchmark that includes large, mid, and small-cap stocks. However, it has had a more mixed performance when compared to the Nifty Financial Services TRI, outperforming it in only 11% of the cases over the same period.
"The most recent outperformance came in September 2023, primarily due to the absence of large-cap private banks, which have underperformed," said Jaiswal.
2. Fund name: Motilal Oswal Nifty MidSmall Healthcare Index Fund
Category: Sectoral (Index)
Benchmark: Nifty MidSmall Healthcare TRI
Portfolio composition: The index's top 10 stocks constitute around 60 per cent of the portfolio. By contrast, the Nifty Healthcare Index is highly concentrated, with 82 per cent of the portfolio formed by the top 10 stocks. There's roughly a one-fifth overlap in the top 10 holdings between the two indices.
How has the index performed in the past?
"From October 2019 to 2024, the index has demonstrated strong performance, consistently outperforming the Nifty Healthcare TRI on a five-year daily rolling basis and beating the Nifty 400 TRI 75 per cent of the time. This performance stems from a more diversified mix across 46 healthcare companies, including pharma, hospitals, and API manufacturing. Notably, 38 of these are mid- and small-cap firms. However, the index has started to underperform the NIFTY 400 TRI since last year," noted Jaiswal.
3. Fund Name: Motilal Oswal Nifty MidSmall IT and Telecom Index Fund
Category: Sectoral (Index)
Benchmark: Nifty MidSmall IT and Telecom TRI
Portfolio Composition:
The fund will track an index that holds 20 stocks, with a significant portion of the weight concentrated in its top 10 holdings. In fact, 76% of the portfolio's weight is accounted for by these top 10 stocks, underscoring the concentrated nature of this sectoral index.
Overlap with Nifty IT Index: While this fund focuses on mid- and small-cap stocks in the IT and Telecom sectors, there is some overlap with the larger Nifty IT Index. Specifically, three companies appear in both indices, accounting for about 14% overlap. However, the Nifty IT Index is far more concentrated, with only 10 stocks, making it a more focused investment compared to the broader, more diversified Nifty MidSmall IT and Telecom Index.
How Has the Index Performed in the Past?
2022 Performance:
In 2022, the index performed strongly, outperforming the broader Nifty 400 TRI by around 15%, noted Value Research.
Steady Edge Since 2022:
Following its strong showing in 2022, the index has maintained a steady edge, consistently outperforming the broader market by approximately 9%. This suggests that the mid- and small-cap stocks in the IT and Telecom sectors have shown stable growth and have the potential to continue doing so.
"After a strong 2022, beating the Nifty 400 by around 15 per cent, the index has kept a steady edge of about 9 per cent this drop is due to a rally in other sectors. It's performing better compared to the Nifty IT Index, which mainly has large-cap IT companies. In 2024, it outperformed Nifty IT by 16 per cent on average, compared to just 6 per cent in 2023 and 2 per cent in 2022. This improvement comes as large-cap IT companies face a slowdown due to global economic pressures and the presence of a more diversified mix of stocks in the mid- and small-cap space," noted Jaiswal.
4. Fund Name: Motilal Oswal Nifty MidSmall India Consumption Index Fund
Category: Thematic (Index)
Benchmark: Nifty MidSmall India Consumption TRI
Portfolio Composition:
The fund tracks an index that is heavily weighted towards three key sectors:
- Healthcare
- Consumer Durables
- FMCG (Fast-Moving Consumer Goods)
Together, these sectors make up around 60% of the index’s weight, which offers investors focused exposure to the fast-growing consumption space. This differs from the broader Nifty India Consumption Index, which includes a larger mix of automobiles, consumer services, and FMCG. Notably, the Motilal Oswal fund excludes the automobile sector in favor of smaller, high-growth consumption sectors, allowing it to target emerging players in healthcare and consumer goods.
Stock Concentration: Nearly 50% of the portfolio's weight is concentrated in its top 10 holdings. This concentrated stock selection offers investors high exposure to the most prominent players in the index, but it also means that performance will be largely driven by the top stocks in the portfolio.
Stock Selection Criteria: Unlike the Nifty India Consumption Index, which applies a 10% cap per stock, the Motilal Oswal fund uses a free-float market capitalization methodology for stock selection, which means it gives greater weight to stocks based on the number of shares that are available for trading. This is different from the Nifty India Consumption Index, which caps individual stock exposure at 10%. This feature allows the Motilal Oswal fund to adjust more flexibly to market changes and capture the growth potential of larger companies within the mid- and small-cap space.
Past performance
"From October 2019 to 2024, this index has shown cyclical performance, outperforming the Nifty India Consumption TRI 89 per cent of the time and the Nifty 400 TRI 64 per cent of the time on a five-year daily rolling basis.
Recently, it has lagged behind the Nifty 400 index due to about 40 per cent allocation to FMCG and Consumer Durables, both impacted by rising input costs and weaker consumer spending," noted Jaiswal.
Exit load:
The exit load will be uniform across all four funds. If you redeem your units on or before 15 days from the date of allotment, an exit fee of 1 per cent of the applicable NAV (net asset value) will be charged.
The NAV is the per-unit price of the fund, which fluctuates based on the performance of the underlying assets.
Example: If you invested in a Motilal Oswal index fund, and the NAV on the day of your redemption is Rs 100 per unit, and you redeem within 15 days, the exit load would be 1% of Rs 100, which amounts to Rs 1 per unit. So, you would receive Rs 99 per unit after the exit load is deducted.
After 15 Days: If you redeem your units after 15 days, there will be no exit load, and you can sell your units without any penalty.
Tax Treatment of the Investment
The tax treatment for the Motilal Oswal index funds is based on capital gains tax — tax paid on the profit earned from the sale of mutual fund units.
Short-Term Capital Gains (STCG):
If you sell your units within one year of purchasing them, any profit earned is considered short-term capital gains (STCG).
Tax Rate: The tax on STCG is 20%, meaning you will be taxed 20% on the profit made from selling the units.
Example: If you bought units for Rs 100 and sold them for Rs 120 within a year, your capital gain is Rs 20. In this case, you would pay 20% tax on Rs 20, which equals Rs 4.
Long-Term Capital Gains (LTCG):
If you hold your units for more than one year before selling them, the gains are classified as long-term capital gains (LTCG).
Tax Rate: The tax on LTCG is 12.5%, which is lower than the STCG tax rate.
Tax-Free Gains: However, there is a tax-exemption limit of Rs 1.25 lakh for LTCG in a financial year. This means if your long-term capital gains are below Rs 1.25 lakh in a year, they will be tax-exempt.
Should you invest?
"Though sectoral and thematic NFOs may be all the rage, they are riskier than diversified funds. This is because they provide targeted exposure to specific industries, resulting in highly concentrated portfolios, making these funds more volatile. Instead, you can consider multi-cap and flexi-cap funds , which invest across market caps and sectors. However, if you're keen on investing in these funds, we suggest allocating only a small portion of your portfolio to them," said Value Research's Jaiswal.