What happens to the Coupon payment received on the underlying security?
The coupon received on the underlying security will be reinvested in the underlying index constituent.
What is Nifty Free Float Midcap 100 Index?
Nifty Free Float Midcap 100 Index is formulated by India Index Services & Products Limited (IISL), a joint venture between NSE and CRISIL Ltd. It comprises 100 Free Float Midcap stocks with their weightage in index being determined based on their free float market capitalisation.The primary objective of the Nifty Free Float Midcap 100 Index is to capture the movement and be a benchmark of the Midcap segment of the market.
What is NASDAQ-100 Index?
The NASDAQ-100 is an index of 100 of the largest (by market capitalization) non-financial companies listed on the NASDAQ. It is a modified capitalization-weighted index. The companies weights in the index are based on their market capitalizations, with certain rules capping the influence of the largest components. It does not contain financial companies, and also includes companies incorporated outside the United States.
What is NASDAQ?
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. It is the largest electronic screen-based equity securities trading market in the United States and second largest by market capitalization in the world. The NASDAQ has more trading volume than any other electronic stock exchange in the world. When the NASDAQ stock exchange began trading on February 8, 1971, it was the world's first electronic stock market (Source: NASDAQ Website).
What is index investing?
Passive investing is an investing strategy that tracks a market-weighted index. It broadly refers to a buy-and-hold portfolio strategy for long-term investment horizons, with minimal trading in the market. Investing in Index funds and ETFs are the most common form of passive investing.
What is an index fund?
An index fund is a type of mutual fund which constructs its portfolio by tracking the composition of a standard market index such as the Nifty 50 or the Sensex. The fund not only invests in stocks which constitute the benchmark index but also the same proportion. For example a rise of 1% in the index will lead to a 1% increase in the fund and vice versa. There are numerous indexes (Nifty50, Nifty 500, Nifty Smallcap 150) and many others.
How does an index fund work?
An index fund is a diversified equity fund delivers returns in line with the index it tracks. For example a midcap 150 index fund will track the nifty midcap 150 index.The fund manager simply replicates the portfolio of the index in quantity, stocks and proportion. The fund manager has no discretion over stock selection/ strategy of the mutual fund and so the fund has no fund manager bias.
Who should invest in index funds?
Index funds are suited for passive investors i.e. investors who are looking to build long-term wealth but Don't have time to manage their portfolio Want to stay away from constant monitoring and juggling their mutual fund portfolio. Are skeptical about active fund manager's long-term efficiency to generate returns above the benchmark index. For an investment horizon of 10+ years, index funds remain the most efficient mutual fund.
Who manages index funds?
Just like actively managed mutual funds, index funds are also managed by fund managers. But fund managers have a little role to play as all they have to do is replicate the index.
Why are index funds popular in other parts of the world?
Popularity of index funds is mainly due to following reasons: Index funds are cheap to invest. Fees play a big role in long-term investing Index funds do better than most actively managed funds (especially in the long-term) Survivorship of active funds is low (on an average only 40% of active funds survive after 10 years in the US)
Why should you not invest in index funds?
Index funds are built to replicate the index and most active fund managers charge fees to outperform indexes. Therefore, an investor who is purely looking to do better than the index should not invest in index funds. Its important to point out that very few funds end up doing better than the index in the long-run.
Why should you invest in index funds?
Low Cost: Since index funds are passively managed, the total expense ratio (TER) is very less as compared to the actively managed ones. While an actively managed fund may charge you anything between 1-2% as TER, an index fund would typically charge you between 0.20% and 0.50%. At face value, the cost difference may seem small but in the long run, it can become as large as 15% of net returns.
Diversification: The biggest benefit of mutual funds is diversification. Holding a basket of stocks is proved to be a lot safer than holding individual securities. An index fund has proved to be more diversified since it does not invest in any particular sector, theme or a strategy. Hence lower risk. Minimal Scope for bias: Since the allocation of assets in case of index funds is not at the discretion of the fund manager, there is no scope of making losses due to inefficiency in asset allocation or poor management.
Choices: Some index funds track broad market indexes (like large-cap, mid-cap etc.). Meanwhile, others track specific sectors or industry groups thus, offering a wide range of choices. Tax efficiency: There is little to no churn in investing in an index. Therefore tax is minimized
Returns: The average mutual fund typically fails to beat the broad indexes. With this in mind, index funds are a great way to capture broader-market returns. Better Risk Management: Index funds enable easier risk management due to the stability of its portfolio and the weights. In addition, Its clear that a large cap index is less risky/volatile than a small-cap. It may not be clear for other non-index funds. Long-term investing: Fund managers change, most active funds underperform and funds close down all the time. Index funds negate all of the above. Therefore, great for investing for 10 years+.
Why is Motilal Oswal launching 4 index funds?
All 4 Index funds are very unique and differ in risk and return category. Our goal is to not go sell these funds individually but to allow investors to choose the ones that match their risk appetite and return expectations. For example a risk lover with high return expectations would choose the Motilal Oswal Nifty Small cap 250 Index Fund/ Motilal Oswal Nifty Midcap 150 Index Fund whereas a risk averse investor may choose the Motilal Oswal Nifty 500 Fund.
Which index fund should I invest in?
Motilal Oswal offers 4 index funds- Motilal Oswal Nifty Midcap 150 Index Fund, Motilal Oswal Nifty Smallcap 250 Index Fund, Motilal Oswal Nifty 500 Fund and MO Nifty Bank Index Fund. While deciding where to invest, you must keep following things in mind Your risk appetite: How much risk you are willing to take. High returns always come with high risk Your return expectations All our funds are unique and are built to deliver different risk and return combinations.
Can I lose money investing in index funds?
Like in all mutual funds there is always risk of losing money in the short-run. An index losing 1% daily will lead to the index fund's value falling by 1%. However over the long-run index funds have delivered healthy returns.
Should I pay attention to independent fund ratings?
Ratings from independent sources is one of the convenient ways to compare different mutual funds. But they rely heavily on 3-5 past performance which is not a good indicator of future performance. In addition independent ratings do not take into consideration risk profile of individual investors.
What is diversification and how does it help in reducing risk?
Diversification is the process of spreading risk by investing in multiple securities as opposed to a few. The rationale behind diversification is that a portfolio constructed of different kinds of securities will lead to higher long-term returns and lower the risk of buying one or two securities.
Benefits of diversification: Minimizing risk of loss if one investment performs poorly over a certain period, other investments may perform better over that same period, reducing the potential losses of your investment portfolio from concentrating all your capital under one type of investment. Preserving capital not all investors are in the accumulation phase of life; some who are close to retirement have goals oriented towards preservation of capital, and diversification can help protect your savings. Generating returns sometimes investments don't always perform as expected, by diversifying you're not merely relying upon one source for income.
Why is Motilal Oswal launching index funds and not ETF’s?
Motilal Oswal AMC has been a pioneer in the ETF space. MOAMC launched their first ETF in 2010 and subsequently launched the other two ETF's. MOAMC is launching Index funds since they are considered efficient and customer centric. Some other benefits over ETFs are: No Liquidity problems: The industry is plagued with liquidity issues when it comes to trading ETF's.ETF's today are mostly bought and sold by institutions who prefer to go directly to the AMC and not the exchange.Retail + HNI customers as a result pay a premium to buy an ETF and sell ETFs at a discount. This adds cost and leads to a higher tracking error for the investor.Index funds however are directly bought from the AMC who provide daily liquidity.
Demat Account All investors wanting to buy an ETF need to open a Demat account and buy the unit on the exchange. Buying an index fund is similar to buying any mutual fund Brokerage costs Investors in ETF's pay brokerage costs (on buying and selling) in addition to the expense ratio. Brokerage and other trading related costs are embedded in the expense ratio Simpler to understand Index funds are pure passive funds. ETFs however may not be (eg. CPSE ETF). Customers see index funds as natural investment vehicles whereas ETF's are seen as trading instruments. SIP option Setting SIPs are possible in index funds (not possible in ETF's).
Why are index funds so cheap?
In order to compensate the managers for their time and expertise for selecting stocks and managing the portfolio, a management fee is charged by active fund managers. Also because of frequent buying and selling of stocks, it leads to increase in trading cost. Index funds which is passively managed, follows a buy and hold portfolio strategy. Constituents of the portfolio seldom change, so fund manager's role is minimized. That's why index funds are cheaper than actively traded funds.
Are all index funds the same?
Index funds are passive mutual funds that track a particular index. There are different types of indices in India- Benchmark indices BSE Sensex and NSE Nifty Sectoral indices like BSE Bankex and Nifty Bank Market capitalization-based indices like the BSE Smallcap and Nifty Midcap Broad-market indices like BSE 100 and Nifty 500 All index funds are not same because different index funds track different indices. But the philosophy behind investing remains the same.
What is tracking error? Why does it happen?
The extent to which the index fund does not track the index properly is known as tracking error. It is the difference between a fund's portfolio returns and the benchmark index it was designed to track. Low tracking error means a portfolio is closely following its benchmark. Reasons for occurrence of tracking error- Index is a dynamic combination and the constituents change. Till the time the fund manager also adjusts the fund holdings accordingly, there will be tracking error present in the fund. Expense ratio of the fund also drags down the overall performance.
What is alpha and beta?
Alpha and beta are two of the most important concepts in investing in mutual funds. Beta represents market returns or benchmark returns. This index funds are built to deliver beta (market) returns. Alpha represents the return in excess of beta returns. For example if the market/benchmark delivers 8% whereas a fund manager delivers 10%, alpha is 2%. Every fund manager's goal is to provide alpha. If he/she fails to deliver alpha, then investors are better off investing in beta products (index funds).
What is expense ratio?
Expense ratio is defined as per unit cost spent for managing funds. Expenses generally include management fees and operating expenses. Index funds generally have lower expense ratios than actively managed funds.
What is entry/exit load?
Entry Load: This is a charge or commission given by the investor at the time of the initial stage of investment purchase to the mutual fund company. The entry load is usually deducted from the investment amount, reducing the quantum of investment. In India, entry load is zero.
Exit Load: Exit load in a mutual fund is a charge paid by the investors for selling mutual fund shares before the fixed time period. The commission is a percentage of the share's value that is being sold. The return earned on selling the investment is reduced as the exit load is charged from the NAV. Exit load is different for different schemes.
Why do Motilal Oswal index funds have an exit load?
MO index funds are open ended funds, whereby investors have the choice to exit the investment plan anytime. However we at Motilal Oswal believe index funds are great for long-term investing and therefore want to attract investors who want to buy them from a long-term perspective. In addition trading (buying and selling securities) incurs transaction costs which are shared by all investors. We want to limit trading and hence have an exit load (up to 3 months).
How does a direct and regular plan work?
All mutual fund schemes offer two plans- Direct and Regular. In a Direct Plan, an investor has to invest directly with the AMC, with no distributor to facilitate the transaction and no investment advice. In a Regular Plan, the investor invests through an intermediary such as distributor, broker or banker who does all the market research, gives investment advice and is paid a distribution fee by the AMC, which is charged to the plan. Therefore, the direct plan has a lower expense ratio as there is no distribution fee involved, while the regular plan has a slightly higher expense ratio to account for the commission paid to a distributor to facilitate the transaction.
Why SIP is a great way to invest?
Benefits of investing in a SIP- Convenience: You can invest in a disciplined and phased manner using SIP. It allows you the convenience of starting your investment with as low as Rs. 500. Cost Averaging: With SIPs- there is no need to time the market. By investing in SIP you buy shares when prices are low and also when prices are high. This reduces your overall cost of investment. Power of Compounding: The basic principle of compound interest implies that small amounts invested over a long period of time would result in a larger return compared to a one-time investment. Become a disciplined investor: An SIP investment would make you more disciplined in matters of managing your finances. With the option of automated payments, it means you don't have to remember every month.
