The recent rally in the stock market has largely been driven by select largecap companies while the broader market that includes midcap and smallcap segment is still struggling with subdued returns. The rally in largecap-focussed indexes has put the focus back on index funds. This comes at a time when fund managers of a large number of active funds have not been able to beat their respective benchmarks.
Index funds are passive way of investing in which the return generated by a mutual fund is almost similar to the index it follows. Investor’s money in an index fund is invested in all the stocks that are present in the index and in similar proportion of their weights in the index. As no active participation of a fund manager is involved in index funds, these are available at lesser cost.
Motilal Oswal Asset Management Company (MOAMC) has launched two large cap index (passive) funds – Motilal Oswal Nifty 50 Index Fund and Motilal Oswal NiftyNext 50 Index Fund. The NFO for these two funds opened on Tuesday and will close on December 17. The two new funds will respectively follow the two most popular indices in India – Large-Cap Nifty 50 and Nifty Next 50.
Aashish Somaiyaa, MD & CEO, MOAMC said, “These launches are in continuation of our recent efforts to make passive investing investor friendly. We have launched open-ended index funds with an ability to price those as low as Rs 500. We have received enthusiastic response to our index fund launches as they have gained prominence among digitally savvy DIY investors as well as distributors and advisors who take low cost tools for asset allocation and financial planning very seriously.”
Largecap index funds are known to provide stability as they are large in size, dominant in their sectors and generally have good customer reputation. Besides the capital appreciation in terms of stock price movement, these funds also get additional income in the form of dividends as many large cap stocks generally pay steady dividends.
Should you invest?
The large-cap index fund is typically expected to give returns almost similar to an index except for expense and tracking error. On the other hand, actively managed large-cap funds, in order to beat the index, include some percentage of midcap and smallcap companies in their portfolios. In the recent past, midcap and smallcap companies have underperformed significantly. As a result, many of these funds are unable to match the return given by the index. Hence, it is likely to be incrementally difficult for active largecap funds to generate considerable alpha. If you prefer your investment on pure allocation, then mixing of market caps to beat indexes is not ideal for you because it increases the risk of the portfolio while index funds can give you almost similar returns without increasing your risk.
Historically, as the stock market went through multiple cycles of bull and bear markets, there were many instances when index funds scored above active funds. Given the scenario, a pure largecap index fund could be one of the good options in your decided asset allocation of large cap funds.
One may consider adding these two large cap index funds by Motilal Oswal AMC in the portfolio for wealth creation. However, don’t compromise with your long-term investment strategy just because largecap indexes are performing better now. You should only invest the amount as per your decided asset allocation. Most importantly, NFO should not be a mandatory entry point as you can invest in the two funds any time and in any quantum even after the NFO.
Source: Business Today| MONEY