Motilal Oswal AMC has launched a new fund of fund named Motilal Oswal Nasdaq 100 FOF. The FOF or Fund of Funds will invest in Motilal Oswal NASDAQ 100 ETF. The new scheme will offer investors in India an opportunity to invest in US stocks via Systematic Investment Plan or SIP. However, mutual fund advisors are divided on whether retail investors should invest in this New Fund Offer or NFO that will close for subscription on November 22.
“International funds or investing in USA is basically for diversification in a retail portfolio. So, I believe that investors should choose feeder funds over ETFs and FOFs in the international markets. Hence, investors can give this new scheme a miss,” says Vishal Dhawan, Founder, Plan Ahead Wealth Advisors.
For new comers, Fund of Funds or FoFs invest in the units of other funds. Motilal Oswal Nasdaq 100 Fund of Fund is a passive scheme investing in units of Motilal Oswal Nasdaq 100 Exchange Traded Fund.
Dhawan also points out that the concentrated portfolio of the scheme is also a concern. “The Nasdaq 100 majorly constitutes the big tech players from the USA like, Facebook, Google, Netflix etc. This makes it a very technology sector specific index. Moreover, the valuations of this index are very expensive. This makes it less attractive for Indian retail investors,” says Vishal Dhawan.
However, some mutual funds advisors are recommending the NFO to their clients. They say the golden rule to opt for a seasoned fund instead of a newbie doesnt apply to this NFO. Because the new FOF will invest in an ETF, it doesn’t need a track record. This scheme will essentially invest in the ETF tracking the Nasdaq 100, so the track record will be that of the index,” says Santosh Joseph, Founder and CEO, Germinate Wealth Solutions LLP.
Advisors also point out FoFs are a easy way to invest abroad for retails investors, as they allow investors to invest via SIPs. Retail investors can’t invest in ETFs because of the high ticket size. The Motilal Oswal Nasdaq 100 Fund allows a minimum application amount of Rs 500.
However, critics like Dhawan points out that investors should focus on post-tax returns instead of just easiness when it comes diversifying their investments across geographies. “The FoFs are a convenient way of investing in ETFs but they are taxed as debt funds. Which is where they lag the feeder funds,” says Vishal Dhawan.
Equity mutual funds held over a year qualify for long term capital gains tax – returns in excess of Rs 1 lakh in a financial year is taxed at 10 per cent. FoFs, on the other, are taxed like debt mutual funds. FoF investments sold before a year attract short term capital gains tax – the returns are added to the income and taxed according to the income tax slab applicable to the investor. Investments sold after three years are taxed at 20 per cent with indexation benefit.
For diversification, planners like Dhawan believe that investors are better off investing in Indian feeder funds which invest in the US stock markets. These actively managed funds diversify across different sectors of the US market.
However, there is a catch here as well. “Feeder fund would have a better portfolio but they would underperform the benchmark. The USA is a developed market and active schemes struggle to beat the benchmark in such markets. So, investors will have better ease of investing than ETFs but the returns would be lower,” says Santosh Joseph.