Motilal Oswal S&P 500 Index Fund - a cheaper alternative to invest in US stocks

Motilal Oswal S&P 500 Index Fund - a cheaper alternative to invest in US stocks

The New Fund Offer will open on Wednesday and close on April 23. The minimum investment limit has been fixed at Rs 500


  • Motilal Oswal AMC launches first index fund in international MF category
  • S&P 500 Index Fund to replicate US' S&P 500 index, comprising 82 per cent of the US market
  • The NFO starts on April 15 and closes on April 23
  • Total expense ratio is 0.5 per cent for the direct plan and 1 per cent for the regular plan
  • Take into account market and exchange rate-related risks before investing

International mutual funds had caught investor attention before the coronavirus-induced market crash hit investor sentiment across the world. If the steep fall doesn't scare you and you believe the markets will start resuscitating over the next few months, you have a new and comparatively cheaper option to nibble into US equities - Motilal Oswal S&P 500 Index Fund.

While plenty of active mutual funds invest in global stocks, Motilal Oswal Asset Management Company has come up with a passive mutual fund, S&P 500 Index Fund, that will replicate S&P 500 Index comprising 500 leading companies in the US, constituting 82 per cent of the US stock market. "In 2018, more than 40 per cent of the sales of S&P 500 constituents were reported from foreign countries, so it will give investors global exposure also," says the AMC.

The New Fund Offer will open on Wednesday and close on April 23. The minimum investment limit has been fixed at Rs 500.

"It's the first ever index fund in the international mutual funds category, although some actively managed funds already invest in the US market such as Franklin India US Opportunities Fund, Kotak US Equity Fund, DSP US Flexible Fund and ICICI Prudential US Blue-Chip Fund, etc. Some of them are feeder funds, i.e. they are the fund of funds, while others are actively managed funds that invest directly in the identified market. Both the strategies are expensive, when it comes to the cost. But this new offering being a passive strategy is a low cost proposition," says Jashan Arora, Director Master Capital Services.

As per Motilal Oswal's scheme information document (SID), the total expense ratio (TER) of the S&P 500 index fund will be 1 per cent for the regular plan and 0.5 per cent for the direct plan. By comparison, actively managed funds charge nearly 2-2.5 per cent TER for their regular plans.

Should coronavirus deter you from US exposure?

Even as we are trudging along an uncharted territory where we can't estimate the duration of the coronavirus-induced slowdown, one thing is sure that the post corona world would be quite different with corporates writing new rules of the game on business continuity plans and how they conduct global operations. There could be a new pecking order on the global growth chart. In such an uncertain environment, experts advise to participate in the new growth order instead of keeping full equity exposure in the home country.

"International exposure should be looked at as an opportunity to participate in the 97 per cent of world's GDP as India holds only 3 per cent share of the world GDP. With the current state of economy, whether Indian or global, it can be a right time to participate in worldwide growth in the coming years as we had already been witnessing a slowdown for last 1.5 years in global growth including in India," says Arora.

What about exchange rate risk?

When you invest in an international fund, you take the currency risk. The rupee has been hitting fresh lows against dollar. If you invest at the current levels and the currency appreciates over the next few months, even as the value of the fund increases, the exchange rate loss may offset the gains. "The rupee weakened to its lowest levels over the past month and while this is a positive for investors who are already invested in foreign assets, it has heightened the risks of inducing fresh investments into a foreign currency denominated fund," points out Kavitha Krishnan, Senior Analyst - Manager Research, Morningstar India.

However, it is hard to predict or time the exchange rate movement. If you plan to invest in global equities with a long-term horizon, you should not be bothered about exchange rate risks. Global exposure will act as a hedge in your portfolio. Moreover, if you have a financial goal that requires transaction in foreign currency, for example, foreign trip or higher education abroad, serving it by investing in international mutual funds is advisable. "If you have a financial goal that involves spending in foreign currency, you'll be better off investing abroad as a hedge against rupee depreciation," says Erik Hon, MD, iFAST Financial India.

Should you invest in the NFO?

Apart from the expense ratio, tracking error is another key element to take into account before you invest in a passive fund. Tracking error is basically the standard deviation between daily returns from the underlying index and the NAV of the index fund. While fund houses try their best to minimise the tracking error, for Motilal Oswal S&P 500 index fund, it will be known only after the NFO closes and the fund starts investments.

According to Morningstar India, investors should invest in funds that have minimum track record of three years. "We urge investors to look at a combination of qualitative and quantitative factors before investing. Having said that, Motilal Oswal has a proven track record as an AMC. Moreover, considering that the scheme-related documents clearly outline the fact that this is an index fund, we don't see any factors that should deter investors from considering this fund, provided that it meets their investment goals," says Krishnan of Morningstar India.

Index funds are typically made up of best companies of the theme or the sector which the index represents and when it is a diversified index, it can be a good addition to portfolio of both new as well as seasoned investors. "If you enter the Indian equity markets and you have no clue where to start, you would start with the A group in BSE, similarly if you enter the global equity markets from another planet and you have no clue where to start, you should start with S&P 500. It's the world's A group or the world's large cap index composed of some of the biggest global companies," says Aashish Somaiyaa, Managing Director & CEO, Motilal Oswal AMC.

Thus, if you want to add some global pie in your asset allocation factoring in the market-related risks, MOSL S&P 500 index fund could be a good starting point - whether in the NFO or after the fund proves its credentials. Besides the usual equity-related risk, the fund also holds additional currency risk, therefore, it would be advisable to keep your exposure limited to 10 per cent of your overall portfolio.

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