Weekly Musings – NFO Pick (Tata Nifty Capital Markets Index Fund)

7 Oct 2024 , 04:11 AM

WHY NIFTY CAPITAL MARKETS INDEX FUND?

In India, the number of stock related to the financial markets were very limited. About 15 years back a number of leading broking houses entered the fray to list their stocks. However, the last few years, several new capital market intermediaries have got listed. These include stock exchanges like BSE and MCX. It also includes asset management companies like HDFC AMC, Nippon Life AMC, Birla AMC, and UTI AMC. The only depository to be listed in India is CDSL and NSDL is proposed to become a listed company soon. Then there are the equity and mutual fund registrars like CAMS Online and KFIN Technologies (formerly Karvy Computershare), which are also listed companies now.

This is overall and above the brokers and the wealth management companies that are already listed on the stock exchanges. If you combine all these kinds of stocks together, you get a very unique theme of financialization of savings in India. These are the intermediaries and market infrastructure institutions that are helping savers convert their money into productive investments and also offering support services. More importantly, they represent the theme of financialization of markets as the average Indian investors moves increasingly from physical investments in gold and property to financial investments in stocks, mutual funds, and bonds. That is the unique trend that this index plans to capture. The Tata Nifty Capital Markets Index Fund will be the first of its kind in India.

COMPOSITION OF THE NIFTY CAPITAL MARKETS INDEX

The table below captures the 15 components of the Nifty Capital Market Index, which is the universe wherein the fund will invest. The Tata Nifty Capital Markets Index Fund is a passive fund that will look to precisely mirror the above index. It will not only replicate the portfolio, but also the weightages of various stocks in the portfolio. As and when the composition of the index undergoes a change, the portfolio of the Tata Nifty Capital Markets Index Fund will also undergo a change and rebalance in the new proportions. Here is a quick look at the stock mix of the Nifty Capital Markets Index.

 

Company Name	Industry	Symbol	ISIN Code
360 ONE WAM Ltd.	Financial Services	360ONE	INE466L01038
Aditya Birla Sun Life AMC Ltd.	Financial Services	ABSLAMC	INE404A01024
Anand Rathi Wealth Ltd.	Financial Services	ANANDRATHI	INE463V01026
Angel One Ltd.	Financial Services	ANGELONE	INE732I01013
BSE Ltd.	Financial Services	BSE	INE118H01025
Central Depository Services (India) Ltd.	Financial Services	CDSL	INE736A01011
Computer Age Management Services Ltd.	Financial Services	CAMS	INE596I01012
HDFC Asset Management Company Ltd.	Financial Services	HDFCAMC	INE127D01025
Indian Energy Exchange Ltd.	Financial Services	IEX	INE022Q01020
KFIN Technologies Ltd.	Financial Services	KFINTECH	INE138Y01010
Motilal Oswal Financial Services Ltd.	Financial Services	MOTILALOFS	INE338I01027
Multi Commodity Exchange of India Ltd.	Financial Services	MCX	INE745G01035
Nippon Life India Asset Management Ltd.	Financial Services	NAM-INDIA	INE298J01013
Nuvama Wealth Management Ltd.	Financial Services	NUVAMA	INE531F01015
UTI Asset Management Company Ltd.	Financial Services	UTIAMC	INE094J01016

Data Source: NSE

The above captures the list of companies that constitute the Nifty Capital Markets Index, which the fund proposes to replicate. Let us also look at the composition of the portfolio in terms of its composition and the impact cost. (Impact cost is the impact that a sizable purchase has on the index, and is a key metrics for index funds).

Company Name	Weight	Impact Cost
HDFC Asset Management Company Ltd.	17.41%	0.03%
BSE Ltd.	15.12%	0.04%
Multi Commodity Exchange of India Ltd.	10.57%	0.04%
Central Depository Services (India) Ltd.	9.61%	0.04%
Computer Age Management Services Ltd.	7.99%	0.03%
Indian Energy Exchange Ltd.	6.38%	0.03%
Angel One Ltd	5.58%	0.03%
360 One WAM Ltd	5.52%	0.08%
Nippon Life India Asset Management Ltd.	4.52%	0.05%
Motilal Oswal Financial Services Ltd.	4.11%	0.06%
KFIN Technologies Ltd	4.11%	0.07%
Anand Rathi Wealth Ltd	2.65%	0.06%
Nuvama Wealth Management Ltd.	2.36%	0.09%
Aditya Birla Sun Life AMC Ltd	2.05%	0.08%
UTI Asset Management Company Ltd.	2.03%	0.06%

Data Source: Scheme Information Document (SID)

If you look at the above weights table, it is clear that the top 5 companies in the index account for close to 61% of the overall weight of the index.

KEY HIGHLIGHTS OF THE NIFTY CAPITAL MARKETS INDEX

Here are some of the key highlights of the Nifty Capital Markets Index, which is captured in the points highlighted below.

• It is a free float based index and the weight of each stock will be based on its free float market cap, giving sufficient accent to the total available public float in the stock.
• The index has a total of 15 constituents and can go up to 20 constituents in total. The index was launched in September 2024 and has a base date of April 2019. The index will be rebalanced on a semi-annual basis.
• The index has generated very strong returns over various time periods. For instance, on a TRI basis, the index has generated 104.78% on a 1-year return basis and has generated a compounded annual growth rate (CAGR) of 34.8% over the last 5 years, which is extremely impressive.
• The index has a standard deviation in the range of 24% to 25%, which is relatively high. However, in terms of beta, the stock is aggressive on a 1-year basis but defensive on a 5-year basis. Its correlation with the Nifty ranges between 0.5 and 0.6, which is low and makes the index a good tool to diversify overall portfolio risk.
• The company has a current price earnings ratio (PER) of 45.93X, price to book (P/BV) of 12.91X, and dividend yield of 0.99%. Clearly, the valuations are on the higher side and could post risks if the earnings do not live up the growth in P/E.

GLANCE AT THE TATA NIFTY CAPITAL MARKETS INDEX FUND NFO

Here are some details of the Tata Nifty Capital Markets Index Fund NFO you must know to decide on investing in the fund.

• The NFO of Tata Nifty Capital Markets Index Fund opens for subscription on October 07, 2024 and will close on October 21, 2024. Being an open-ended index fund, it will reopen for sale and repurchase anywhere between 3 days and 15 days of NFO closure. The Tata Nifty Capital Markets Index Fund is best suited to investors looking for thematic participation in a family of stocks that represent the financialization of Indian savings and the central role played by the capital markets and the key intermediaries. This fund offers participation in the full gamut of such capital market players.
• The core focus of the Tata Nifty Capital Markets Index Fund, being a thematic index fund, is to mirror the Nifty Capital Markets Index TRI (total returns index). The fund will create portfolio that will exactly mirror the Nifty Capital Markets Index in terms of composition of stocks and the weightages. Considering the nature of the stocks in the space, the fund would largely be a mid-cap to small cap fund.
• On the Standard SEBI Risk-O-Meter, the Tata Nifty Capital Markets Index Fund will be ranked as a Very High Risk Fund. The high risk is an outcome of the predominant exposure to equities mirroring the Nifty Capital Markets Index Fund. In addition, there is the risk of entering into the markets at close to lifetime highs as well as relatively steep valuations of mid-caps. Also, the financial stocks have been outperformers in the last few years, so valuation risks also exist. Above all, being an index fund, even though there is not attempt to beat the index, the tracking error risk is always there.
• The Tata Nifty Capital Markets Index Fund is about generating long term capital growth through a passive strategy of just sticking to the thematic Nifty Capital markets index. There will be no focus on stock selection as the portfolio will mirror the underlying Nifty Capital Markets Index, with the attempt of the fund managers to minimize the tracking error. The fund will offer growth option and the IDCW option to investors. The fund will also offer the Regular Plans as well as the Direct Plans as per SEBI guidelines.
• Investors can invest in the NFO of Tata Nifty Capital Markets Index Fund in minimum size of ₹5,000 lumpsum and in multiples thereof. There is no minimum amount for switch-in from other Tata MF funds. However, additional purchases will have to be in minimum of ₹1,000 and in multiples of ₹1 thereof. Redemptions will have to be in minimum of ₹500 or 50 units, whichever has the lower value. The fund also supports the systematic investment plans (SIPs), systematic withdrawal plans (SWP), and the systematic transfer plans (STPs) programs on a structured and long term basis.
• There is no entry load, but conditional exit load will be there to protect the interests of the continuing investors in the fund. If units are redeemed within 15 days of the allotment date, then there will be an exit load of 0.5% of the valued of the redeemed u nits. Any redemption done after 15 days, will not attract any exit load from the fund. However, aside from exit loads, investors are advised to hold this fund for at least 5-7 years to realize the full potential across business cycles.
• Being an index equity fund, the Tata Nifty Capital Markets Index Fund does not give any guarantee on returns and the performance of the fund is subject to the vagaries of the markets in general and the performance of the index in particular. The Tata Nifty Capital Markets Index Fund will exactly mirror the Nifty Capital Markets Index TRI and, being a passive index fund, there is no question of beating the index. However, there is a possibility that the fund may not be able to precisely mirror the index returns.
• The Tata Nifty Capital Markets Index Fund will be managed by Kapil Menon. The intent of the fund management team will be to precisely mirror the Nifty Capital Markets Index TRI and to minimize the tracking error of the fund. Computer Age Management Services (CAMS) will be the registrars to the fund.

The Tata Nifty Capital Markets Index Fund NFO offers an opportunity for investors to participate in the theme of financialization of markets with financial markets as the theme.

TAX TREATMENT FOR TATA NIFTY CAPITAL MARKETS INDEX FUND

Tata Nifty Capital Markets Index Fund will be classified as an equity fund for tax purposes. The tax provisions below are pursuant to the changes made in the full Union Budget presented on July 23, 2024; and changes are effective for transactions after July 23, 2024.

• Dividends declared (if any) by the fund will be taxed at the peak rate of tax applicable. In addition, if the overall dividends exceed ₹5,000 in a year, they will be subject to tax deduction at source (TDS) at the extant TDS rates.
• Time frame for classification as long term capital gains (LTCG) will remain 1 year for the Tata Nifty Capital Markets Index Fund. STCG (held for less than 1 year) will be taxed at 20% on gains plus cess at 4%, making effective STCG rate 20.80%.
• The LTCG on the fund (1 year holding and above) will be taxed at a flat rate of 12.5%. However, threshold exemption limit has been increased from ₹1 Lakh to ₹1.25 Lakhs. In this case, the actual tax impact will be 13% after including 4% cess.

It is what you earn from the Tata Nifty Capital Markets Index Fund in post-tax terms that matters. That is why, it is essential to understand tax implications.