The Mutual Fund Show: What You Need To Know About Motilal Oswal, Edelweiss AMC’s New Passive Fund Offers

While the debate over whether investors should buy and sell stocks directly to beat benchmarks or are they better off sticking to indices continues, two asset managers have launched new passive schemes.

The first new fund offer—Motilal Oswal Asset Allocation Passive FoF—invests across asset classes, geographies, and the option of investing in a conservative or aggressive fund of funds rests with the investor, according to Pratik Oswal, head of passive funds business at Motilal Oswal Asset Management Co. All investors should principally construct the portfolio having allocation across asset classes so that volatility in one is negated by the stability in the other at any given point in time, he said in BloombergQuint’s weekly special series The Mutual Fund Show.

Investing fully in equities, according to Oswal, is a good strategy but the only problem is that not many people are able to take volatility that’s associated with equity. “And hence, asset allocation funds are the preferred route.”

He, however, said these funds are subject to debt taxation, implying a much higher tax rate than equity funds. But the benefit of indexation is available to investors with the appetite to hold such funds for a slightly longer period, Oswal said.

Edelweiss Asset Management Co. is launching a Nifty PSU Bond Plus SDL Index Fund, which the fund house claims to be India’s first debt index fund.

This is an addition to a range of passive debt products with a target maturity offered by the fund house. “Target maturity products are ones where you have a defined time period, whether it’s three years, five years, etc., and you just have a buy and hold strategy,” said Radhika Gupta, managing director and chief executive officer at Edelweiss AMC. “This can work really well as an investor knows the portfolio and the indicative yield.”

On why an investor should choose Nifty PSU Bond Plus SDL Index Fund over Bharat Bond ETF, Gupta said the new fund gives a 50% PSU and 50% state development loan basket product.

The reason to invest in SDLs, at the current point of time, according to her, is “because of the circumstances around us and borrowing of the states, SDLs are actually trading at higher yields than PSUs,” Gupta said. “So, for the investor there is a very good risk-adjusted return ahead, where you’re getting better yields than a pure PSU product but at actually a very good credit risk profile. Just like the Government of India has borrowings, which we know as G-Sec; SDL is borrowing of good quality states and are sovereign rated.”

The offering makes sense for investors looking to hold on till maturity, according to Gurmeet Chaddah, CEO of Complete Circle Consultants. “The medium to longer end (6-7) year maturity yields may spike and remain under pressure due to rise in inflation.” Larger borrowing by states can widen the spread between SDLs and G-Sec, leading to volatility and Mark-to-Market impact, the financial planner added.

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