While building their passive product bouquets, mutual fund houses are going beyond the popular frontline indices. Motilal Oswal Mutual Fund joins the bandwagon by launching a new fund offer (NFO) of the Motilal Oswal S&P BSE Financials ex Bank 30 Index Fund (MOBF). This is unlike many other bank-based mutual fund schemes (including exchange-traded funds) out there. Should you invest in it?
What is on offer
MOBF intends to replicate the performance of S&P BSE Financials ex Bank 20 Index, before fees and tracking error. The underlying index has 30 constituents selected from financial sector stocks out of the 250 largest stocks by market cap on the BSE. These stocks are the largest among financials and selected on the basis of six-month daily float adjusted market capitalisation. The index excludes banks.
The index was launched on November 16, 2021 and is rebalanced twice a year, in June and December.
The index comprises non-banking finance companies (28.2 percent), life insurance companies (21.2 percent), housing finance companies (17.8 percent) and other financial services companies as on June 30, 2022. The numbers in the bracket indicate the weight of these sub-segments in the index. This index can be an effective way to take exposure to emerging financial services companies, other than banks.
What works
Financial services companies in the areas of housing finance, insurance, asset management, financial market infrastructure and allied services have a long growth pathway ahead. Due to low penetration of these services and the rising income levels in the country, the demand for these services may grow multi-fold. This may benefit long-term investors in these companies.
“Most diversified large, large and mid-cap mutual fund schemes have to allocate money to bank stocks, given their weight in benchmark indices. In the last couple of decades, we have seen this strategy working out as the large five banks and their subsidiaries offering financial services created wealth for investors. However, as banks reduce their stakes in these subsidiaries due to various reasons, including regulatory norms and increasing competition from ‘non-bank’ financial entities, it is time to look beyond banks,” says a fund manager from a competing fund house, who did not wish to be named.
Pratik Oswal, Head of Passive Funds, Motilal Oswal Asset Management Company, says, “Financial services can offer strong growth in the long term. The scheme will enable Indian investors to capitalise on the growth of financialisation of assets, shifting consumer mindset from saving to investing, and benefit from the companies that will gain from the consumption theme.”
What doesn’t work
The Banking, Financial Services and Insurance (BFSI) sector has a significant weight in most indices designed on the basis of market capitalisation of stocks. Arun Kumar, Head of Research, FundsIndia.com, says, “The BFSI sector is well represented in most diversified portfolios as well as indices. In sectoral funds dedicated to the BFSI segment the fund managers have some minimal leeway to choose the stocks and contain the downside.”
But there is another side to the coin when it comes to relying on the existing products for exposure to financial services. “Existing indices as well as actively-managed equity funds allocate a large chunk of money to shares of banks. This leaves the financial services companies with less representation in investors’ portfolios. That is where MOBF aims to fill the gap,” says Oswal.
For example, Nifty Financial Services Index has 65 percent allocation to banks.
MOBF can be more volatile than the other diversified alternatives. A more diversified alternative such as a financial sector fund can be a better bet for someone looking for exposure to the financial sector, in addition to what is held by diversified equity funds.
Oswal says, “MOBF being a sectoral offering, expect high volatility compared to other diversified equity funds. Only those investors with conviction should consider investment in this.”
“Given the narrow mandate of this product this can be used only by very savvy investors looking for a significant exposure to some segments of the BFSI sector. This product is not meant for regular investors looking to invest regularly via SIP (systematic investment plans) into mutual funds,” says Kumar.
What should you do?
This cannot be your first investment in mutual funds. Beginners should ideally stick to diversified equity funds and exposure should be taken in a staggered manner using SIPs.
MOBF can cater to the needs of a handful of savvy investors looking to own a set of financial services stocks with a view on the segment. This strategy calls for a seasoned understanding of the working of the financial sector. You need to have a far bullish view on financial services than on banks to invest in this offering. If you are generally bullish on BFSI, then you are better off with an actively-managed financial services sector fund. If you are bullish on public sector banks or private sector banks or banking as a whole, then there are dedicated schemes that track these segments.
Being a sectoral offering, you need to get both the entry and exit right, which also entails relatively elevated risk. The NFO closes on July 22, 2022.
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