Why Motilal Oswal AMC’s Pratik Oswal prefers the Nifty 500 over the Nifty 50

In an interview with Mint, Pratik Oswal, head of passive funds at Motilal Oswal Asset Management Co. (AMC), shares his views on passive investments, the shift in interest from benchmark-based indices to more-broad based and thematic indices, and more.

If you had to allocate ₹100 today, as a new investor, how would you do it?

If I was a new investor, I would first figure out what my risk appetite is. For me, asset allocation is more important than fund selection. For example, if you are an aggressive investor with a long-term horizon, you can have 60-80% of your portfolio towards large- and mid-cap equities, preferably through mutual funds, and the balance you can allocate towards international equities or fixed income instruments. Invest 5-10% in assets like gold and silver if you can. This is a good allocation to have. What we at Motilal Oswal also believe is that by having your eggs in multiple baskets, you are essentially removing a lot of volatility from your portfolio. By baskets, I don’t mean multiple funds but asset classes.

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I noticed you did not mention small-cap stocks. Has the rally there gone too far?

No. I think small-caps are for someone who has a higher risk appetite. Small-cap stocks today are behaving like the mid-cap stocks of yesterday. When we launched our small-cap index fund in 2019, an average small-cap company had a market capitalization of ₹4,500 crore, while today that number is ₹25,000 crore, which is similar to what a mid-cap company was maybe five-seven years ago. So, I think you can’t attribute the same risk to a small-cap stock as you did five years ago. In fact, I feel more people should adopt investing in small-cap companies today, because they have become a lot more mature than they were a few years ago.

If I were quite to be aggressive, how much should I put into small-cap stocks?

I do not recommend direct stocks, especially for new investors; unless you are a full-time investor, it’s hard to make money. Whereas in mutual funds, you have professional fund managers, whose daily job is to determine which stocks to buy and sell. So, you rely on their expertise or you can look at index funds or ETFs (exchange-traded funds). Also, as a stock investor, it is difficult to understand which sector is going to do well in the coming times and you need a lot of expertise to do so. If you look at the index, earlier we had utilities, infrastructure, and now we have IT (information technology), and tomorrow it might be something else. And times change quickly nowadays. Mutual funds are more equipped to adapt to this change. That is why mutual funds are more preferable over direct stocks in that case.

Tell us about your micro-cap index fund. Is there a liquidity risk there?

Our micro-cap index is not very large; it’s about ₹1,000 crore. The stress test comes into play when the fund or the category is large. Micro-cap as a category is not as large as small-cap, and that’s why a lot of money is going in small-caps today. We don’t feel the need to have additional measures here. Also, as an index fund, our job is to replicate the index and nothing else, and we are doing that. The beauty of a micro-cap index fund is that the top 10 stocks have equally distributed weights, the top 10 companies are about 10% of even less of the overall index. It is almost like an equal-weight index; it is a well-designed index. As we observe, the volumes are growing there about 10-15x of what we have to buy on a daily basis. These flows are big enough and they are increasing. Post the fund launch, the weight average volumes have gone up 3x. Now, they have probably gone up more.

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Are you still accepting money in your Nasdaq ETF?

It really depends on markets and the inflows-outflows which will determine if the RBI (Reserve Bank of India) limit will be hit in a few months or a few years. But we have some limits and we are able to build markets. In fact, in the last 10 days, we have created new liquidity worth ₹40,000 crore on the exchange. So far, we are managing the fund quite well to ensure the prices are efficient. Post the Sebi (Securities and Exchange Board of India) ban on international funds that came in 2022, for several months we could not do market making. Later, after a few clarifications, we started again. We are confident that based on the current flows, we will be able to manage the fund as long as possible.

Currently, we have tried to maintain the 1% spread between the market price and our NAV (net asset value), which has been the maximum cap and that has been consistent for the last five years. There is some economics there needs to go to the market maker also. As the US markets are shut when the Indian markets are open, there is an element of cost attached to it.

For an Indian investor, who is buying into the Nasdaq ETF? Does it reflect the price of the Nasdaq index’s previous day?

No, actually the Nasdaq ETF is reflecting the Nasdaq index’s futures price in the US.What really happens is when the US markets are closed, the futures markets are still open 24 hours a day, five days a week, which you can buy and sell. So, the Nasdaq ETF’s price reflects the live price of the Nasdaq index’s future prices. And we want to make sure that we are 1% away from that price, which is actually the most accurate price. Because, when the Indian markets close and the US markets open, what we have seen is they normally open close to where the future prices are and not at the previous day’s market prices.

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We also publish the indicative NAV on our website and now we are mandated to do it on the stock exchange as well. However, this is not a real-time feed; the prices are updated almost every 15 minutes and now it has got more narrowed.

Can you elaborate more on the shift in passive investments, from benchmark-based to more broad-based indices and also to thematic indices?

We believe that investors should look at products that are beyond the traditional passive products, because they might be as relevant as they were 10 years ago. For example, the Nifty index, it’s a great index that we endorse. But, as we know, about 60% of that index is invested in the top 10 stocks, which is only covering about 40% of Indian equity. As India gets larger and markets get more breadth, that 40% will go down to 30% or even 20% over the next decade. It makes sense to invest in passive products that are more comprehensive in nature that cover more of equity.

The Nifty 500 is my favourite. It is a benchmark which covers almost 95% of Indian equity. Done well in terms of returns and in fact less risky than the Nifty 50, with lower standard deviation as there is more stock as well as sector diversification in the Nifty 500 in spite of having small- and mid-caps. That’s one idea about which we are talking to investors about.

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Thematic passive investing is almost like someone taking a short-term bet on some theme that they are positive about. Someone sent me a message yesterday about how there is a ‘US cannabis index’. Because of some regulatory news, all these cannabis ETFs are seeing a huge demand and people who had invested made money. So, I think a lot of these theme-based passive ideas are fairly investable.