Motilal Oswal Asset Management Company is launching an asset allocation passive funds of funds, a fund that will essentially invest in a mix of domestic equity fund, international equity fund, a debt fund and gold fund.
For those who are looking to invest in a diversified basket in one go, funds like this one could be a good option. But, do remember, it will be a static asset allocation, which means there won’t be any dynamic asset allocation involved depending on market conditions. But, there will be periodic rebalancing to ensure that the asset allocation in each category stays within range.
If you opt for the aggressive asset allocation FoF, then 70 per cent of your investment will go towards equity (50 per cent domestic equity and 20 per cent international equity), while if you choose the conservative FoF, then equity investments will be capped at 40 per cent.
“In an environment where equity is at all-time highs, debt yields at lows and gold being highest performing asset class in 2020, we believe a multi-asset solution is a low-risk way of deploying capital,” said Pratik Oswal, head of passive funds at Motilal Oswal AMC.
UTI AMC is also launching a new fund this week, Nifty200 momentum 30 index fund. Here also the aim would be to follow an index that will capture a momentum factor of investment.
Of late, the passive investing strategy has gained a lot of traction in India and these funds are just two examples amid a plethora of index funds and ETFs that have been launched by several fund houses over the past couple of years.
Typically, there are active funds and passive funds. In an active fund, its the fund manager who decides on which stocks, sectors, geographies etc to invest the fund’s resources in, with the idea to beat the broader benchmark index. Passive investing, on the other hand, is a strategy where the fund manager will not have any major active role in the investment strategy. For instance, if you have a Nifty50 index fund, then the resources that the fund raises will be invested in the Nifty 50 index and the fund portfolio will mirror the composition of the said index.
Off late, it has been observed that not many active funds have been able to outperform the market. According to data from SPIVA (S&P Indices versus Active), as of June 2020, 80.43 per cent of funds underperformed the BSE 100 index. Even on a one-year basis, 48.39 per cent of the funds underperformed.
Performance apart, passive funds like the index funds are also low cost as the fund management expenses are far lower. The expense ratio of actively managed funds is typically in the range of 1-2 per cent or even more. Many index funds on the other hand charge an expense ratio of 0.5 per cent or less. ETFs have even lower expense ratio. If an investor is investing from a long-term horizon, then the expenses will matter and even the 1-2 per cent will add up on a compounded basis.
In developed markets like the US, passive index funds now account for a large chunk of the industry assets under management. In India, while active funds still dominate, ETFs and index funds have started gaining traction.
According to data from Association of Mutual Funds of India, net assets under management of index funds stood at Rs 15,359 crore at the end of January, almost double the Rs 7,944 crore AUM at the end of January 2020. Similarly, in the same period, net AUM of ETFs (other than gold ETF) has risen 46 per cent from Rs 1.75 trillion in Jan 2020 to Rs 2.57 trillion at the end of Jan 2021.
Oswal says in a few years, passive funds could become a core of an investor’s portfolio, with a few active funds on top, he added.
Motilal Oswal AMC, which already manages a basket of active as well as passive funds, last year launched the S&P500 index fund, which is an international index fund tracking the US-benchmark stock market index. The company is also exploring an emerging markets index fund, according to Oswal. Many other fund houses including ICICI Prudential, Aditya Birla Sun Life AMC and HDFC Asset Management have index funds in their portfolio.
Should you invest in passive funds over active funds?
“Large-cap funds have underperformed for multiple reasons, a primary reason is that after SEBI changed its category in 2018 and restricted the universe of large caps, funds have found it difficult to beat the index. We have been recommending switching to index funds in the large-cap space,” said Vidya Bala, founding partner and head of research and product at Prime Investor.
Even as Bala bats in favour of index funds in large caps, she says active funds will continue to thrive, especially if the fund is in niche categories like focused funds or in cases like small and mid-caps where stock picking becomes important.
“If you have a differentiated product or if you are in the lower rung of the market cap, active investing still makes sense for investors,” said Bala.
Another important thing to note is that investors must decide on their investments based on their risk appetite and picking up an index fund, doesn’t necessarily mean there is low risk.
In India, where the options are still limited, investors could have a mix of active and passive strategies, say analysts at investment adviser Morningstar.
“The debate over whether investors should use active or passive strategies in their portfolios has traditionally been viewed through the lens of outperforming a benchmark. In reality, both can co-exist in a portfolio where an investor can follow a blended approach,” Morningstar said.