The concept of fundamental indexing is finally making its way into India. On Thursday, Motilal Oswal Asset Management Company (MOAMC) launched India’s first fundamentally-weighted Exchange Traded Fund (ETF), MOSt 50. MOSt 50 is based on Nifty’s 50 constituents and will be open will be open for subscription from June 30.
Unlike traditional index funds, where weightage of each stock is determined on the basis of free-float market capitalisation, MOSt 50 will assign weightages to each stock, based on stock fundamentals, as measured by financial parameters such as return on equity, price to earnings etc. Fundamental indices over the long term are expected to outperform the market cap weighted ones, as it automatically buys more of under-valued stocks and less of over-valued stocks. Globally, fundamental indexing is well-known among investors, though it is a relatively new concept. Rafi 1000 was the first index to be launched by Roger Arnott somewhere in 2005 while index funds made its debut in 1976. MOSt 50 index has outperformed the Nifty in last three years ? by a wide margin, as per data provided by MOAMC. MOSt 50 gave an annualised return of 23.7% as compared to 10.7% for Nifty, since April ‘2007. Even globally, some fundamental index funds have beaten the market. According to Bloomberg data, since April 2003, FTSE Rafi Emerging Market index(fundamental index) gave a return of 394%,while it was 258% for the MSCI Emerging market. Yet, in terms of assets under management, market cap weighted indices are more popular with close to $1.03 trillion globally.
ETF’s is growing in popularity globally, with more fund managers under-performing the market, but it is yet to take off in India. The asset under management (AUM) of ETF in India is just over Rs 3,200 crore, a trifle for the 8.03 lakh crore mutual fund industry.
?Assets of MF industry are expected to touch Rs 50 lakh crore in next five-six years, providing a great opportunity for investment businesses and MOSt 50 ETF is the first initiative to address this opportunity,? said Ramdeo Agarwal, MD of Motilal Oswal Financial Services Ltd (MOFSL).
The MOSt 50 index is underweight on real estate, oil and FMCG while remaining overweight on Auto, pharma, metal, power and banking and financial services. For instance automotive stocks have a higher weight age of 12.80% in MOSt 50 as compared to 5.20% in Nifty. Oil and telecom stocks which have a weightage of 15.80% and 4% respectively in Nifty 50 index have a weightage of just 2.40% and 1.85% respectively in MOSt 50 . And the rebalancing of the weightage among the index constituents will be undertaken periodically.