The key to wealth creation is right asset allocation

The post-Covid era saw new investors flocking into the markets, to such investors, and in general "We strongly suggest that one should not look to time the market, but should focus on time in the market. Several research have indicated that, timing becomes less relevant when it comes to long-term investing. The key to wealth creation is right asset allocation. Hence, investors should diversify their funds across asset classes (domestic equity, debt, gold, international equity) and take a disciplined approach (SIP) to investing," says Mahavir Kaswa, Head-Research of Passive Funds, Motilal Oswal Asset Management in an exclusive interview with Bizz Buzz.

Motilal Oswal AMC has recently launched index funds and ETFs tracking value and quality. Do you think investing in index funds will create investor wealth in the current scenario?

After successfully launching funds tracking the two factors - momentum and low volatility- it was logical to launch funds on value and quality, thereby offering the entire bouquet of widely accepted factors. With the availability of all factors, one may choose to build a factor portfolio as he wishes. We at Motilal Oswal AMC strongly believe that passive funds are easy to understand, effective for wealth creation and economical due to their lower expense ratio.

Moreover, if you look at the developed markets, it has been observed that active fund's performance against the benchmark hasn't been too encouraging; hence, the adoption of passive funds has been phenomenal. We feel a similar trend is emerging in India with increasing awareness among the investor fraternity. Our constant endeavour has been to offer a bouquet of low-cost investment solutions to investors to help build their portfolios. Currently, we manage more than 28 funds with an AUM of Rs14,000 crore. The post-Covid era saw new investors flocking to the markets, to such investors, and in general we strongly suggest that one should not look to time the market but should focus on time in the market. Several research have indicated that, timing becomes less relevant when it comes to long-term investing. The key to wealth creation is right asset allocation. Hence investor should diversify their funds across asset classes (domestic equity, debt, gold, international equity) and take a disciplined approach (SIP) to investing.

How is Motilal Oswal AMC different from other new-age fund houses that advocate passive investing?

At Motilal Oswal AMC, we intend to offer products backed by strong research. For example- We launched an ETF tracking the Nasdaq 100 Index a decade ago, which at the time seemed a contrarian bet, but fast forward to 2020-21 it was the best performing index in the world. So today, we are seen as pioneers in international investing. Similarly, we have done extensive research on factors globally and the available factor indices in India, and basis this study, we finalized indices which offer pure factor exposure. Our study on factors has been well received by market intermediaries alike. In addition to the product research, we are focused on creating awareness of passive funds and how investors can use different strategies in the portfolio. We do so by frequently publishing blogs or organizing investment conclave.

It is said that one should always look to rebalance the portfolio when the portfolio is underperforming. How do passive funds help in rebalancing?

Outperformance and underperformance are two sides of a coin. No fund can consistently outperform the markets and eventually revert to mean. A lot of research has suggested that due to frequent churn in the portfolio, investors return tend to lag the fund returns almost majority of the times. Hence we advise investors not to chase performance and stick with their funds to play out. On the other hand, passive funds track a benchmark which factors-in the collective wisdom of the markets and has a built-in rebalancing mechanism. So it practically becomes a Fill it-Shut It- Forget it strategy.

Motilal Oswal Mutual Fund launched S&P BSE financials ex-bank 30 index fund which is the first of its kind. What could be the reason of other non-bank financial companies are highly under-penetrated?

Motilal Oswal S&P BSE Financial ex-bank 30 Index Fund is an exciting offering as it focuses on financial services beyond the banking stocks. India is in a sweet spot with an increasing middle class population, the disposable income is rising and multitude of positive macros. This translates to increased investable surplus and consumption which would eventually benefit the financial services. A recent report by RBI highlighted that this sector has emerged stronger post-pandemic. The financial space will mature from a bank-dominated space to a hybrid system, wherein non-bank intermediaries will gain prominence. Many of the firms in this segment have reinvented their business models and are now leveraging technology to reach out to masses. Hence investors looking to gain from this growth should look at the Motilal Oswal S&P BSE Financial ex Bank 30 Index Fund.

What would you advise to investors while investing in index-based funds or ETFs? What factors should be considered before selecting an index fund?

Identifying a passive fund is much simpler compared to identifying an active fund. Firstly, one must identify the category in which he intends to invest and within that category one must look at the following factors: Assets under management (larger the better), expense ratio (lower the better), tracking error (lower the better) and tracking difference (lower the better).

We strongly advise investors to take exposure to a passive fund that provides broadest exposure to domestic markets i.e. fund tracking the Nifty 500 Index. The Nifty 500 Index provides exposure to large, mid and small cap stocks hence it becomes an all-weather portfolio for investors as the large caps tend to do well during market uncertainty while during bull markets the mid and small cap tend to do well. A know nothing investor would be better off by investing into asset allocation funds that invest passively across asset classes. We offer two such solution- Motilal Oswal Asset Allocation Passive Fund of Fund- Aggressive and Motilal Oswal Asset Allocation Passive Fund of Fund- Conservative. These are first of kind passive asset allocation solutions.

What are the other products in pipeline for the current year 2022?

After covering broad based fund offerings that may form a part of investors core portfolio. We would look to launch more products that could form a smaller part of the portfolio (Satellite). We are exploring different concepts in the thematic space and also in the debt segment. We also recently launched an interesting offering that offers exposure to the precious metals (gold and silver). This fund will act as a good diversifier, especially in times of uncertainty when the diversification of a traditional portfolio (equity+bond) reduces. Also one may look at it as a smart way to save for the jewellery you have been eyeing and thinking to purchase in the near future.