Motilal Oswal Nifty 500 Fund: Avoid & stick to Nifty 50 Index funds

Motilal Oswal Nifty 500 Fund Avoid & stick to Nifty 50 Index funds

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Here is why you should avoid Motilal Oswal Nifty 500 Fund and stick to established Nifty 50 index funds. It is a pity that people assume that by buying 500 stocks they are actually buying the whole market and will something extra compared to large cap index fund tracking the Nifty 50 or the Sensex. Do not believe in sales attempts that Nifty 500 is similar to S & P 500!

The first aspect to understand is index construction. Indices like Sensex, Nifty 50, Nifty 500 are based on free-float market capitalization. This means, higher the market cap of a stock, higher the weight in the index. Market cap does not decrease gradually. It falls down rather dramatically as shown below. Data source: AMFI

Also read: Motilal Oswal Nifty Midcap 150 Index Fund: Should you invest? and

Motilal Oswal Nifty Smallcap 250 Index Fund: Will this make a difference?

 

Motilal Oswal Nifty 500 Fund: Why Avoid

Market Capitalization of Top 500 NSE Stocks June 2019If you keep in mind that higher the market cap, higher the weight in the index, this graph alone should be clear as to why you should avoid the Motilal Oswal Nifty 500 Fund (open for sale as NFO from today) and stick to well established Nifty 50 index funds with low cost and low tracking error (the former does not imply the latter) and reasonable AUM. If AUM is not significant, the index fund could beat the index!! See: These five index funds beat their indices! Why you should avoid them!

If you need further convincing check out the latest factsheets of Nifty 50 and Nifty 500 and compare the top ten stocks in each.

Top Ten Nifty 50 stocks (July 2019)

Stock NameWeight
HDFC Bank Ltd.10.73
Reliance Industries Ltd.8.81
Housing Development Finance8.05
Infosys Ltd.6.65
ICICI Bank Ltd.6.04
ITC Ltd.5.12
Tata Consultancy Services5.11
Kotak Mahindra Bank4.48
Larsen & Toubro3.78
Axis Bank Ltd.3.04

Add the weights of the top ten and it is 61.81%. This means the remaining 40 stocks only have about 38% representation.

Top Ten Nifty 500 stocks (July 2019)

Stock NameWeight
HDFC Bank Ltd.7.59
Reliance Industries Ltd.6.24
Housing Development Finance5.7
Infosys Ltd.4.71
ICICI Bank Ltd.4.28
ITC Ltd.3.62
Tata Consultancy Services3.62
Kotak Mahindra Bank3.17
Larsen & Toubro2.68
Axis Bank Ltd.2.15

So the top 10 stocks of a 500 stock index gobble up 43.76% of the weight! They are the same stocks as the top 10 in Nifty 50 (in fact the top 50 of Nifty 500 = Nifty 50). If you are interested in investing in Motilal Oswal Nifty 500 Fund because it represents 96% of the NSE stock market cap, think carefully. Are you really getting anything significantly extra by adding 450 stocks? To get the weights of the all the 500 stocks you could consult the Motilal Oswal Nifty 500 Fund scheme document

Nifty 500 is 82.75% Nifty 10012.35% Nifty Midcap 150 + 4.88% Nifty Small Cap 250 as on July 29 2019

So you are not exactly buying the full market!! If you are still not convinced, let us look are risk and reward.

Nifty 500 vs Nifty 50 (dividends included)

Nifty 500 vs Nifty 50 total return indices since inception dataNow, this makes you want to invest in Motilal Oswal Nifty 500 Fund does it not? Hang on, investigate! Take a look at 2535 ten-year returns indices. The Nifty 500 outperformance is due to the 2002-2008 bull-run. For the last six years, there has not been much difference in the ten-year returns.

Nifty 500 vs Nifty 50 total return indices ten year rolling return data

The same is true of five-year returns too. Whenever there has been a mid-cap small-cap rally, Nifty 500 has done marginally better.

Nifty 500 vs Nifty 50 total return indices five year rolling return data

In terms of risk (volatility), as measured by the rolling standard deviation, Nifty 500 is expected to be lower but is not always so.

Nifty 500 vs Nifty 50 total return indices five year rolling risk or standard deviation dataSummary: Why avoid this new Nifty 500 index fund

The Nifty 500 index does not consistently beat the Nifty 50 index. It does so only during bull runs. This is because it is essentially a large cap index dure to market cap weight in the portfolio. There is no point investing this just for the occasional benefit. A true passive investor is better off with a mix of Nifty 50 and Nifty Next 50 indices and lower returns with systematic or tactical rebalancing among the funds: See: Combine Nifty and Nifty Next 50 funds to create large, mid cap index portfolios also see Eight ways to combine Nifty Next 50 with active funds

Managing a 500 stock index is a bit harder than a 50 stock index. Older investors may recall Goldman ran CNX 500 Index fund but was closed before the AMC was sold to Reliance (and then merged with Reliance Nifty Fund). This cover page of Motilal Oswal Nifty 500 Fund brochure is incorrect.

Motilal Oswal Nifty 500 Fund brochure cover page

Here are some numbers from Goldman Sachs Mutual Fund Abridged Annual Report 2015 – 2016 Since inception, January 6, 2009, the CNX 500 Index Fund (regular plan) returned 14.69% (as on March 31, 2016) while the benchmark index (total returns) moved up by 15.72%. This is fairly decent (for a regular plan). This fund has a tracking error of 0.17%  based on 3 years of monthly data history as on March 31, 2016. This is higher than 0.11% reported for Nifty BeES ETF. Total AUM of the CNX 500 index fundas on March 31, 2016: Rs. 58.30 crores (2,280 investors). Trivia: tracking error of Junior BeES ETF was a lot higher.

So even if we assume comparable expenses ratios and direct plans, a Nifty 500 index fund is expected to deviate a bit more from its index than a Nifty 50 index fund. This is expected and nothing wrong. However, is this deviation worth as an investor considering that Nifty 500 risk and reward is comparable most of the time to Nifty 50? Such a passively managed Indian fund has not witnessed a big market up or down moves. How well they will be able to track the index then is an unknown.

Also, AUM is a big factor. Even if Motilal Oswal urges its distributors to push the regular plan (yes even for index funds, regular plan AUM is higher in India, ironic, but is how it is. Do not go by twitter babble.), the AUM will not be significant and should take a while to reach at least 1000 Crores.

Considering all this, why should I choose Motilal Oswal Nifty 500 Fund instead of a well established Nifty 50 index fund or actively traded Nifty 50 ETF? As of now, there are no strong reasons to do so. If you are still interested, observe this fund’s AUM growth, expense ratio movements (yes, they can change a lot!!), tracking error (as in return difference between the fund and its total return index over 6-12 month periods) and then take a call. Do not get carried away by NFO promotions.

What about the Mid cap and small cap index funds to be launched with this fund? Articles are coming up. Also read: Motilal Oswal Nifty Midcap 150 Index Fund: Should you invest? and Motilal Oswal Nifty Smallcap 250 Index Fund: Will this make a difference?

 

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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3 Comments

  1. Thank you for the article Professor.

    “What about the Mid cap and small cap index funds to be launched with this fund? Articles are coming up.”

    I thank you in advance.

  2. Thank you, Sir. I was waiting for your review of these index funds. I am happy that we are finally getting more index funds in India.
    Vanguard founder, John Bogle, in his books advises on going for a total stock market index fund for the simplest portfolio, if available at a low cost. At different time periods, the large caps may perform better and at other times the mid-small caps may perform better… and the invested money will automatically get rebalanced to the poorer performing sector. What do you think of this aspect?
    So instead of Nifty 50 and Next 50 and rebalancing, why not just have a single Nifty 500 fund and capture the market returns?

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