Motilal Oswal Nifty 500 Momentum 50 Index Fund Opens: Key Details

In a quest for better returns, Indian investors are turning towards factor investing. It is an investment strategy based on specific criteria shown to drive returns over time. Some of these common factors include value, momentum, size, quality and low volatility. 

When it comes to factor investing, momentum strategy is the most sought-after, as it corners the highest share in the overall assets under management (AUM) for factor funds. 

Amid this backdrop, Motilal Oswal has introduced a new fund offer (NFO) – the Motilal Oswal Nifty 500 Momentum 50 Index Fund – to provide investors with the advantages of momentum investing. Launched on September 4, 2024, this NFO is designed to track the performance of high-momentum stocks within the Nifty 500 index. In this article, we will explore the details of the scheme, its objectives and the benefits and drawbacks of investing in it. 

About Motilal Oswal Nifty 500 Momentum 50 Index Fund

The Motilal Oswal Nifty 500 Momentum 50 Index Fund is a passively managed fund that aims to mirror the performance of the Nifty 500 Momentum 50 TRI. It is an open-ended scheme, allowing easy entry and exit to investors.

This index fund invests in 50 stocks selected based on their 6-month and 12-month performances. The stocks are selected from the Nifty 500 index and belong to different market capitalisations.  

The primary objective of Motilal Oswal Nifty 500 Momentum 50 Index Fund is to generate returns that before expenses, correspond to the total returns of the securities as represented by Nifty 500 Momentum 50 TRI, subject to tracking error.

The Nifty 500 Momentum 50 TRI has given attractive returns of 75.2% in the last one year and 35.9% in the last five years as of July 31, 2024. It has also outperformed the Nifty 50 TRI in the last 12 out of 19 years. Although the index has given outstanding returns, it may face higher volatility and carries substantial risk.

About Nifty 500 Momentum 50 Index

The Nifty 500 Momentum 50 Index is a benchmark that selects the top 50 companies from the Nifty 500 based on their Normalised Momentum Score. This index follows a momentum investing strategy, focusing on stocks that have recently outperformed. 

In simple terms, momentum investing is a strategy based on the principle of ‘buy higher & sell higher’. The main idea is that stocks with strong past performance are likely to continue their momentum in the near term. The strategy focuses on buying stocks that have shown strong recent performance and selling them when they start to decline.

To construct the index, Nifty 500 stocks are assessed based on their price performance. The momentum score for each company is derived according to their last 6 months and 1-year performance, with adjustments for 12-month volatility to ensure a balanced approach. The top 50 stocks with the strongest momentum are then included in the index. To qualify to be part of the index, the stock should be listed for more than a year. 

The Nifty 500 Momentum 50 Index was launched on June 4, 2024, with a base date of April 1, 2005. The index is rebalanced semi-annually in June and December. It has given impressive returns of 69.51% in one year and 35.77% CAGR in five years as of August 30, 2024. 

Here are the top 10 index constituents:

Source: NSE | As of August 30, 2024

Why Should You Invest in Nifty 500 Momentum 50 Index Fund?

The top advantages of investing in this fund are:

• Multi-Cap Exposure: This index fund offers low-cost exposure to high-momentum stocks from the large, mid and small-cap space.
• Strong Historical Performance: The index has consistently outperformed the Nifty 50 TRI over the last many years, underscoring the benefits of investing in a momentum-based strategy.
• Systematic Approach: The fund uses a rule-based, transparent methodology for stock selection, reducing the risk of human bias in decision-making.

Risks of Investing In Nifty 500 Momentum 50 Index Fund

Here are the key risks of this index fund:

• Volatility: The fund faces the risk associated with investing in equities. It is susceptible to bouts of volatility in the short term and carries high risk. 
• High Transaction Costs: Momentum investing can result in higher portfolio turnover (how often funds’ assets are bought and sold in a year), potentially leading to increased transaction costs and lower returns.
• Not Suitable for All Market Phases: Momentum investing tends to do better in bullish markets, reducing the scope of returns in a downward-trending market. 

Who Should Invest?

Motilal Oswal Nifty 500 Momentum 50 Index Fund is suitable for investors who are looking for long-term capital growth through investment in a diversified equity portfolio with an emphasis on momentum-driven stocks. It is also ideal for investors who have a high-risk appetite and a long-term investment horizon, given the larger concentration of portfolio in equities. 

Tax Implications of Investing in Nifty 500 Momentum 50 Index Fund

Given this fund invests at least 95% of its assets in the constituents of the Nifty 500 Momentum 50 Index, it is taxed as an equity fund. The tax on capital gains from equity funds is based on the holding period.

Short-Term Capital Gains (STCG): If you redeem units within one year of investment, any gains are considered short-term and taxed at 20%.

Long-Term Capital Gains (LTCG): If you redeem units after holding them for more than one year, gains exceeding ₹1.25 lakh in a financial year are subject to tax at 12.5%.

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