MUMBAI: When the benchmark indices are seeing earnings target cut, Motilal Oswal AMC has launched four broad-based index funds: Mid-cap 150, Nifty 500, Nifty Small-cap 250 and a Nifty Bank Index fund. We spoke to Pratik Oswal, head of passive funds, MOAMC, on the rationale behind and the timing of the launch.
Why index funds now?
We have been actually in the passive investing business. Passive investing is a combination of ETF (exchange-traded funds) and index funds where you don’t really have a fund manager; so it is low-cost investing. We have been in this space for nine years now. We launched India’s first smart beta fund in 2010, M-15. Subsequently, we introduced the first mid-cap ETF in India and also launched a NASDAQ ETF. It was very early, and customers couldn’t differentiate between the active and smart beta. So, in 2013, we pivoted to active business, and has been doing phenomenally well in the last six years. Going forward, we see a lot of opportunity in the passive investing space.
We have actually been running ETFs for nine years. ETFs are not actually the most customer-centric approach. The biggest problem with ETFs today is that there is not much of liquidity in the exchange. Impact cost is quite high on ETFs, which is why not many are happy buying or selling ETFs. And there are quite a lot of intermediaries to negotiate.
Whereas in Index funds, you go directly to the AMC; it provides the daily liquidity and Net Asset Value. An index fund is like any other mutual fund: more of low-cost, and tracks an index. A lot of investors are doing SIP (systematic investment plan) today. You cannot do SIPs on ETFs, but you can do on index funds. In fact, SIPs become easier on index funds; it is also easier for investors to understand.
On the timing of the launch?
SEBI has come down and slashed the distribution fee, banned upfront fees and a lot of similar practices. Because of that, people are looking at low-cost options. Distributors are not as incentivised to sell; so a lot of their focus is moving to Portfolio Management Services and Alternate Investment Funds. SEBI has also recategorised funds into large-, small- and mid-caps. A lot of fund managers now have limited flexibility, and a lot of outperformance can come down. With Digital and DIY, many don’t want to go through distributors as there are several direct options. Index fund provides that level of simplicity for investors.
Why so many broad-based funds at the same time?
The idea was that all these four index funds are unique. They all have very different risk-return profiles and there is no overlap between them. Our objective now is to introduce building blocks of asset allocation. The idea of four funds is to give people an option based on their risk profile and returns expectations, and give this to investment advisors and distributors so that they can make asset allocation for customers.
In terms of broad-based funds, my primary goal actually was to promote simplicity. We didn’t want to have any bias in terms of what people should buy or sell. We are also launching the Bank Index Fund. Why don’t you have private bank, why broader bank? We don’t really want to have a bias, five or six years down the line, if the government decides to privatise banks.
What is your outlook for the markets and indices in the long run?
The best part of an index is you don’t really have to have an outlook. The index is the most democratic system on the planet. It adapts to everything and is re-balanced every quarter. You are buying a top-150 or top-500 company in India. By eliminating fund managers, the index becomes very favourable. For example, 50 or 60 per cent of all stocks that remained higher in 2007 haven’t done that well today, but the index has more than doubled. It is more democratic and low-cost. The idea is to promote long-term investing. I think if you are disciplined and if you are long-term oriented, index funds make sense.