Last Updated on December 29, 2021
This is a review of two Motilal Oswal Asset Allocation Passive Fund of Funds – Aggressive & Conservative currently in the NFO period (9th Feb to 5th Mar 2021). We explain why these offerings are not “passive asset allocation” funds.
What are Motilal Oswal Asset Allocation Passive FoFs?They are two open-ended mutual funds investing in ETFs or index funds of Indian equity (Nifty 500), US equity (S & P 500), Indian Gilts (Nifty 5Y gilt index) and Gold; They are hence known as a fund of fund.
What does conservative and aggressive refer to? There are two funds of funds investing in different passive funds (as mentioned above). They are labelled (somewhat arbitrarily) as aggressive and conservative due to their different indicative asset allocations – see details below.
The so-called “conservative” fund has a risk rating of “high” and the aggressive fund a rating of “very high”. This alone should be enough for investors to reject the “conservative” option (red flag 1).
Are these passive asset allocation fund of funds? No, they are not! They are fund of funds (check); They have an asset allocation (check); They invest in passive products (check). However, these FOFs do not passively follow an asset allocation. They can vary their asset allocation actively within an extensive range, making them active funds (red flag, counted below)
How will these two funds of funds be taxed? As “non-equity” funds (colloquially as debt funds).
Why is the aggressive fund of fund being taxed like equity when it invested 95% in equity? Two reasons. To be taxed like an equity fund, a mutual fund should invest 65% of assets in Indian stocks either directly or indirectly via ETFs. (1) This fund of funds can invest in Indian equity via index funds or ETFs (and not just ETFs). (2) Its asset allocation of Indian equity can go below 65%.
There is a big difference between the asset allocation of the benchmark (created for these funds) and the funds’ asset allocation (red flag 2).
Motilal Oswal Asset Allocation Passive FoF: Aggressive Allocation
Aggressive FOF Benchmark: 60% Nifty 500 TRI + 20% S&P 500
TRI (INR) + 5% Domestic Price of Gold + 15% Nifty 5 Yr Benchmark G-Sec Index
The backtested return performance is for this asset allocation. If the fund sticks to this asset allocation, it would have been a passively managed asset allocation fund. Sadly this is not the case.
The fund has immense freedom to vary its asset allocation (red flag 3)
- 40% to 90% in Motilal Oswal Nifty 500 Index Fund / Motilal Oswal M50 ETF
- 10% to 30% in Motilal Oswal S&P 500 Index Fund / Motilal Oswal NASDAQ 100 ETF
- 0% to 40% in Motilal Oswal 5 Year G – Sec ETF
- 0% to 20% in ICICI Prudential Gold ETF
- 0% to 5% in Money Market (cash)
How will the asset allocation vary? Unknown (red flag 4)
Motilal Oswal Asset Allocation Passive FoF: Conservative Allocation
Benchmark: 25% Nifty 500 TRI + 10% S&P 500 TRI (INR) + 5% Domestic Price of
Gold + 60% Nifty 5 Yr Benchmark G-Sec Index.
The asset allocation can vary significantly in an unknown manner. (red flag 4)
- 0% to 40% in Motilal Oswal Nifty 500 Index Fund / Motilal Oswal M50 ETF
- 0% to 20% in Motilal Oswal S&P 500 Index Fund / Motilal Oswal NASDAQ 100 ETF
- 40% to 90% in Motilal Oswal 5 Year G – Sec ETF
- 0% to 20% in ICICI Prudential Gold ETF
- 0% to 5% in Money Market (cash)
The benchmark allocation performance is of no relevance to ascertain whether to invest in the fund of funds or not due to the unknown investment strategy and significant departure in indicative asset allocation. Therefore their performance is not included in this review (but shall be discussed independently). There are enough red flags to avoid these kichdi offerings: like a food Youtuber making a video out of leftovers, the AMCs has created a product with fancy wordings to drive some AUM into their existing funds. This is just another dynamic asset allocation funds clothed as a fund of fund.
This is not a passive fund of fund. This is an actively managed fund of fund investing in passive funds. This is a huge difference and is enough to reject these two offerings. As mentioned above, investors can quickly leave such offerings within a few minutes by looking for red flags.
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