The advice in the title seems odd as I vouch for index investing. But hear me out first.
The passive funds scene in India is heating up. A new entrant and a very AMC named NAVI Mutual Funds (which is owned by the Flipkart guy) is all set to launch the lowest cost Nifty50 index fund in India.
The AMC has said that it will charge an expense ratio of just 0.06%. That is cheap indeed and pretty aggressive pricing. No doubt. And this comes at the back of recent increase in expenses of index funds by many large fund houses in India.
So how low is this “lowest cost” index fund compared to other index funds in the passive funds category?
- NAVI Nifty Index Fund – Proposed Expense Ratio of 0.06%
- ICICI Prudential Nifty Index Fund – Expense Ratio: 0.10%
- ICICI Prudential Sensex Index Fund – Expense Ratio: 0.10%
- Motilal Oswal Nifty 50 Index Fund – Expense Ratio: 0.10%
- Nippon India Index Fund – Sensex Plan – Expense Ratio: 0.15%
- IDBI Nifty Index Fund – Expense Ratio: 0.16%
- SBI Nifty Index Fund – Expense Ratio: 0.17%
- Tata Index Nifty Fund – Expense Ratio: 0.19%
- HDFC Index Fund Nifty 50 Plan – Expense Ratio: 0.20%
- HDFC Index Fund – Sensex Plan – Expense Ratio: 0.20%
- Nippon India Index Fund – Nifty Plan – Expense Ratio: 0.20%
- UTI Nifty Index Fund – Expense Ratio: 0.20%
- DSP Nifty 50 Index Fund – Expense Ratio: 0.21%
- L&T Nifty 50 Index Fund – Expense Ratio: 0.25%
- L&T Nifty Next 50 Index Fund – Expense Ratio: 0.25%
- Franklin India Index Fund – NSE Nifty Plan – Expense Ratio: 0.26%
- DSP Nifty Next 50 Index Fund – Expense Ratio: 0.29%
- Kotak Nifty Next 50 Index Fund – Expense Ratio: 0.29%
- Motilal Oswal Nifty Next 50 Index Fund – Expense Ratio: 0.30%
- IDBI Nifty Junior Index Fund – Expense Ratio: 0.32%
- UTI Nifty Next 50 Index Fund – Expense Ratio: 0.32%
- ICICI Prudential Nifty Next 50 Index Fund – Expense Ratio: 0.39%
- LIC MF Index-Nifty Plan – Expense Ratio: 0.48%
- LIC MF Index-Sensex Plan – Expense Ratio: 0.57%
- Tata Index Sensex Fund – Expense Ratio: 0.84%
Note – Data as per Valueresearch on 28-Jun-2021. For a full list of index funds, do check the Updated list of Index Funds in India.
So its true that the expense ratio of 0.06% that has been proposed to be charged by the AMC for its direct plan offering is indeed the lowest in the index funds category so far. And it is also true that when it comes to passive index fund investing, lower the expense ratio, better it is as there is no active fund management here. As per the AMC, their “technology-driven approach – helps lower cost for investors”.
But can you be sure that it will remain the cheapest index fund after its launch too?
What will happen after 1 year or 2 years?
I checked their site and they have clearly mentioned this (see the black box in the image below):
Note that they are saying that “This may not be permanent and is subject to change as per market conditions and other factors”.
Your cheapest index fund today may not remain the cheapest index fund tomorrow!
And who knows that tomorrow and like what happens in many developed markets (link), we might see zero-cost index funds in India too! Then what will you do?
So its pretty clear that in order to attract new money and investors, the AMC is trying the “lowest cost index fund” as the main selling point. And that is what is generally used to pitch index funds. Nothing wrong in what the AMC is doing. But as investors, we need to understand that once the initial euphoria about low cost settles down, the AMC will increase the expenses. It has to make profits too. Once sufficient AUM is accumulated, the AMCs tend to increase the expense ratio as they did earlier too (read here).
So you can’t keep hopping in and out of index funds on the basis of expenses alone. Each such move will have costs like capital gains tax, exit loads, etc.
My view is that if your index fund has a sufficiently large AUM and has low tracking error, then just stick to what you have. And if you don’t have an index fund in your portfolio, then do read Should you invest in Index Funds instead of large cap funds?
The new fund offer (NFO) for this cheapest index fund in India will be open soon.
But my advice is to Don’t rush to invest in fund NFO.
It’s better to give a miss to this new index fund by Navi for now and see how things go for them first. Also, let’s see how they do on the tracking error front. The AMC is a very new one though they have some existing funds from acquired business of erstwhile Essel Mutual Fund. But even those existing schemes have very small sizes which makes me ‘not very’ comfortable. Have a look yourself:
- Navi 3 in 1 Fund – AUM of Rs 18 Crore only
- Navi Equity Hybrid Fund – AUM of Rs 116 Crore only
- Navi Flexi Cap Fund – AUM of Rs 201 Crore only
- Navi Large Cap Equity Fund – AUM of Rs 100 Crore only
- Navi Large & Midcap Fund – AUM of Rs 122 Crore only
- Navi Liquid Fund – AUM of Rs 67 Crore only
- Navi Long Term Advantage Fund – AUM of Rs 64 Crore only
- Navi Regular Savings Fund – AUM of Rs 32 Crore only
- Navi Ultra Short Term Fund – AUM of Rs 29 Crore only
That’s less than Rs 750 crore.
Its pocket change in the AMC space! And we don’t know how much AUM they will be able to garner for the new index fund.
I think the size of index fund (or any fund) matters, as larger funds usually have a better hang of things and liquidity.
So not much to say here.
Its good to invest in a low cost index fund. But don’t run around looking to invest in the ‘lowest cost’ cheapest index fund. Pick one or two (amongst Nifty Vs Sensex and then between Nifty Vs Nifty Next50) and then be done with it.
I hope you got the answer to – Should I invest in Index Fund with ‘lowest’ expense ratio in India?