Motilal Oswal Mutual Fund’s first product, the MOSt50, may actually deliver returns through its unique approach towards indexing, provided it doesn’t try to time the market

Motilal Oswal Mutual Fund has come out with its first offering as a fund house—an open-ended exchange traded fund (ETF) called MOSt 50. So how will this first product from the stables of Motilal Oswal Mutual Fund shape up?

Moneylife had earlier mentioned about this product when it had filed its offer document with the Securities and Exchange Board of India (SEBI). We had mentioned that, although it is an ETF product, the MOSt 50 fund is unique in its approach towards indexing. It is not a pure ETF in the broadest sense. As its underlying index, it will use a ‘fundamentally enhanced’ index called MOSt 50 index. While the constituents will be the same as those of the S&P CNX Nifty, the weights would be different. The fund will use a unique way of assigning weights to the constituents of the MOSt 50 index, based on the fundamental financial performance of the constituents and the price at which the constituents are trading.

This approach towards indexing may give the fund an edge over its underlying index. It is interesting to note that this enhanced index has been back-tested with the Nifty in terms of historical performance and has done better than the Nifty.

As an ETF-based offering, the fund has a lot going for it. Over most time periods, actively managed equity funds fail to outperform their respective benchmarks. As such, investors are not assured whether fund returns would at least match the broader index movements. ETFs and equity funds provide a good way out for investors as they mimic the returns provided by the indices.

While index funds have to be purchased directly from a mutual fund, ETFs are bought on a stock exchange and can be freely bought and sold on the exchange, just like a stock. ETFs offer the convenience of intraday purchase and sale, to take advantage of the prevailing price, whereas index funds can be redeemed only at the ‘end of day’ NAV (net asset value).

The NAV of an ETF is a fraction of the index value. If the Nifty is at 5,000, the NAV of one unit of a Nifty-based ETF is one-tenth of the value, that is, Rs500. So an investor buying one unit of an ETF is effectively able to buy the entire basket of Nifty stocks with a lot less money than what he would need to buy individual stocks or an index fund.

However, a drawback with ETFs is that these are not heavily traded and so the bid-ask spread is wide—which reduces gains and increases cost. Volumes in specialised ETFs like MOSt50 would probably be lower—unless, of course, the fund house is successful in drumming up volumes by taking advantage of its sizable broking franchise.

Also, ETFs are a low-cost option for investors, when compared to equity mutual funds and index funds. Normally, ETFs charge 0.50%-0.75%. For instance, the Nifty BeES ETF product, run by Benchmark Mutual Fund, has an expense ratio of 0.50%. However, MOSt50 will charge 1% for managing the fund, which is expensive in comparison.

Overall, the fund’s unique approach towards index investing may actually yield returns for the investor, provided it doesn’t try to time the market or indulge in active investing.