Are Motilal Oswal’s multi-asset passive FoFs good for you?

The asset allocation patterns of the funds are domestic equity (Nifty 500), international equity (S&P 500), fixed income (five-year G-Sec) and commodity (gold). The equity exposure will be capped at 50% in the aggressive and 30% in the conservative fund. The debt allocation will be capped at 20% in aggressive and 50% in conservative.

The AMC will also offer a third option, under which an investor can invest 50:50 in both the funds to get a moderate allocation that will give 40% allocation to equity and 35% to debt.

“In an environment where equity is at all-time highs, debt yields at lows and gold being the best-performing asset class in 2020, we believe a multi-asset solution is a low-risk way of deploying capital. These funds are low-cost and deliver good returns in most market conditions," said Pratik Oswal, head, passive funds, Motilal Oswal AMC, which manages over ₹6,100 crore in passive funds.

“The world over, passive funds have been the chosen funds over the past couple of years and that strategy is also catching up in India now. It can be a decent strategy for investors who don’t know how to allocate their investments," said Mrin Agarwal, founder, Finsafe India Pvt. Ltd.

The main advantages of a passive investment strategy are low expense ratio and unemotional investing, which takes away the behavioural biases of fund managers.

According to Motilal Oswal AMC, the direct plans will have an expense ratio of 5 basis points (bps), but it doesn’t include the expense ratio for underlying funds, which will be in the range of 30-40 bps.

Tarun Birani, founder, TBNG Capital, a Sebi-registered investment adviser, who is positive on passive strategies, says that in the western world as well, the trend towards passive investing is gaining a lot of momentum.

“In the recent rally in India, the market grew by 80-85%, but many fund managers have not performed to that level. So, if one can participate in the rally in a low-cost manner, it will be one of the best ways. Also, on the large-cap side, 80% of funds have underperformed the benchmark. That is again giving a lot of confidence that any strategy that is a passive-oriented theme should do well for long-term investors," he said.

However, investors should not get into passive funds just because of their low cost; they also need to see and evaluate what works better for them and then make a decision.

From the context of tax implications, unlike equity taxation, both Motilal Oswal AMC’s FoFs will be taxed as debt instruments.

Any interest earned on debt funds that are held for more than three years is counted under long-term capital gains. The applicable tax rate in this case is 20% with indexation plus 3% cess, which comes to 20.90%. For holding periods less than three years, gains are taxed at your slab rate.