Motilal Oswal Nifty 500 ETF: Should You Invest or Not?

Alert! 🚨 A new entity has made its presence known in the investment community, and I am here to scrutinise it for your benefit. As per official announcements, this new entity brings ample opportunities for investors to generate a large corpus without observing the market for 70 hours a week. Oops! Sorry, Mr. Narayan Murthy. 😅

By the way, what do you think? Is the Infosys CEO’s verdict about such working hours a good or a bad thing? Let me know your thoughts in the comments. ✍️👇

So, back to the topic. On 27 September 2023, Motilal Oswal Financial Services Ltd., one of the well-known financial services firms in India, launched a new service. It came out with an Open-Ended Equity scheme where, for the first time, an ETF will be tracking the Nifty 500 Index.

The New Fund Offer (NFO) was open for subscription from 27 September to 29 September and will reopen for constant sale within five business days after the allotment date. Save this ⤵️ infographic for the basic details of the ETF scheme.

Motilal Oswal Nifty 500 ETF is a passively managed fund, meaning it does not actively pick stocks like a mutual fund. Instead, the fund simply buys and holds the stocks in the Nifty 500 Index. This makes Motilal Oswal Nifty 500 ETF a low-cost and tax-efficient way to invest in the Indian stock market.

Wondering how this scheme is tax-efficient and low in cost? Keep reading the article for a brief analysis of this and more.

ETF & Nifty 500 Index

For those unaware, the Nifty 500 is a stock market index that tracks the performance of the 500 largest publicly traded companies in India by market capitalisation. You can even say this is the list where all the big players are gathered to win the title of the "best-performing stock in the market". Nifty 500 Index represents around 96.1% of the free float market capitalisation and 96.5% of the National Stock Exchange's (NSE) total turnover.

Hence, the scheme’s performance will be benchmarked as per the Nifty 500 Index's performance. Simply put, the returns provided by Motilal Oswal Nifty 500 ETF might be equal to that of the Nifty 500 Index's securities before expenses. The end result would be subject to tracking error.

So, it would give investors the vibe of earning returns similar to that of expert investors with excellent knowledge of the stock market.

Before we dive into the good and bad parts of the Motilal Oswal Nifty 500 ETF, let's take a quick detour to figure out whether investing in an ETF is the right choice for you.

Mutual Funds Vs ETFs

Imagine you're at a buffet, and you're faced with an overwhelming array of dishes. You could try each one individually, but that would be time-consuming and inefficient. Instead, you could grab a plate and fill it with a little bit of everything. That's what an ETF is: a basket of securities traded on stock exchanges that gives you broad exposure to a particular market.

Now, again, imagine you're at a restaurant and can’t decide what to order from the many dishes on the menu. The waiter suggests the chef's tasting menu. It's a multi-course meal that features the chef's signature dishes. You think of trusting the waiter's judgement and order the tasting menu.

When the food arrives, you're delighted. Just like the perfectly prepared and beautifully plated dishes, a mutual fund is a pool of securities that a professional investment manager manages. The investment manager chooses the securities that they believe will perform well, and they balance the portfolio to reduce risk.
There has been a constant buzz between investors about the best: mutual fund or ETF.

Let’s put an end to the debate today by seeing which option is suitable for all. (The data presented below may not be applicable to all cases.)

So, which one is your choice of flavour? If you are still unsure, then no worries. You could always choose the one after going through the…⬇️

Pointers in Favour of the Nifty 500 ETF Scheme

Whether Motilal Oswal’s Nifty 500 ETF is a good option for investment or not, we need to check varying parameters. Let’s start with the pros of the scheme:

Good Backing with the Nifty 500 Index:

The companies present in the Nifty 500 Index are a mix of large, mid, and small-cap businesses with a good scope of daily average turnover. Thus, the possibility of the index performing well is increased with the pooling of well-diversified baskets of stocks.

It’s very similar to taking Finology ONE’s Subscription plan, as all the good financial prospects are available at your fingertips without looking too far. 🤗

Tracking Error:

As per Motilal Oswal’s official website, the tracking error of the Nifty 500 ETF is 0.04%. A tracking error signifies how frequently a fund is managed, as well as can be a standard for the corresponding risk level. This small number makes all the difference, as diversification is a good factor but can work against the ETF.

Wondering how? Often, the ETFs fail to track all the stocks as closely as is ideal. This is considered a tracking error and could generate negative returns for the investors. Hence, ETFs with huge tracking errors should be avoided by those with low-risk appetite. In the case of Motilal Oswal’s Nifty 500 ETF, the error is pretty minimal.  

Index Sector Wise Weightage:

Every index has a fixed sector weightage % division to track various sectors in the market. A higher weightage % means that the index is more exposed to the performance of that sector. For example, the Nifty 500 index has a high weightage in the financial services sector. This signifies that the index will be more likely to rise if the financial services sector performs well.

However, it will also be more likely to fall if the financial services sector performs poorly.

Thus, choosing an Index ETF also depends on the kind of stocks available in the investor’s portfolio. For your reference, here is a table with the Nifty 500 Index sector weightage %. Open your portfolio and measure the best possibilities.

Read the article 5 Fastest Growing Industries in India to find shares that could have the most growth potential. You could also find the right fit for your portfolio based on various sectors by doing sector-wise comparisons. 

Portfolio Turnover Ratio:

Motilal Oswal’s Nifty 500 ETF is a passively managed fund with a portfolio turnover ratio of 0.2%. This figure portrays that the ETF is not trading its holdings frequently. I know many would jump the gun on how the ratio is way too low. After all, we have the intuition of interconnecting high ratios with a good outcome.

But, the case is not as direct as it may seem. A high portfolio turnover ratio surely means that the fund manager is actively trading the holdings. But, it also means high trading costs for the investors and, of course, high tax implications. And no one wants to pay high investment costs.
I bet the low portfolio turnover ratio doesn’t sound so bad now, eh? 🤑

Sectors that Could be Disadvantageous to Investors

Motilal Oswal Nifty 500 ETF scheme is not a guaranteed or assured scheme. Thus, it has many sections which could be problematic for investors.

Volatility:

Nifty 500 Index is a mix of the top companies from all three sectors: large, mid, and small-cap. And we are all well aware that the stock market is filled with uncertainties. The never-ending cycle of bearish and bullish behaviour of the market could affect Motilal Oswal’s Nifty 500 ETF. Hence, with the prices fluctuating significantly, volatility increased.

Very High Risk Profile:

As discussed above, a maximum portion of the division of instruments includes constituents of the Nifty 500 Index. This makes the ETF scheme a “very high-risk” profile. Thus, it’s essential to analyse the risk tolerance before investing in ETFs. Consulting a professional like a financial advisor would be a better option.

Liquidity Risk:

Before understanding this pointer, it’s essential to get introduced to Authorised Participants, aka APs. An AP is usually an organisation with the licence to create/redeem the shares of an ETF. So, when there is a liquidity shortage of shares, APs generate more.

But, with the Nifty 500 Index, the availability of APs is not guaranteed all the time, which highly increases the liquidity risk.

Author’s Verdict

Yes, I know you're on the edge of your seats, waiting for me to drop my final verdict on whether or not Motilal Oswal’s Nifty 500 ETF scheme is a good investment choice.

But before I do, let me remind you of something I've stressed time and again: the right investment choice depends entirely on the investors’ individual investment goals.

So, if you're planning to create a surplus for your retirement, then the ETF scheme could be a good option. But if your motive for the investment is an immediate goal, like your kid's education or buying a house, you must carefully consider your risk tolerance.
To get started, check out the types of risk and varying parameters by clicking here.

I would also suggest investing in other options as well in case of negative returns. (Remember the “very high-risk” pointer?) There is no harm in being prepared for the worst, right? 🤓

The Bottom Line

I suggest you make a decision after comparing all the aspects mentioned above with your investment goals and risk appetite. Ultimately, it all depends upon an individual's palate and requirements. Reckless investing decisions might also be a reason for financial indigestion, which is not in your investment plans, right?

*Disclaimer: The stocks and companies discussed above aren't a recommendation from Insider by Finology and shall not be construed as a replacement for professional advice. Consult a professional or conduct the necessary research before making investment decisions.