Is it time to invest in lowest costing index funds?

It won't be wrong to say that low-cost index funds are slowly making their place in the Indian mutual fund space. In the last two years, passive investing has gained ground in India and many big mutual fund houses have launched various types of index funds and ETFs. The newest entrant to the space is Flipkart Owner, Sachin Bansal's Navi Mutual Fund. Navi MF has launched India's lowest costing index fund with an expense ratio of 0.06%. This has started a debate of sorts in the mutual fund market. Should investors be lured towards such low costs? Navi MF's lowest costing index fund comes at a time when many other mutual fund houses have increased the expense ratios in passive funds to double in some cases. The lowest in terms of cost after Navi MF are the Nifty funds operated by ICICI Prudential MF and Motilal Oswal MF. Both these funds charge 0.1% as the expense ratio. "Cost considerations are important in investing, but shouldn’t be the only or primary driver of investing decisions. Firstly investors need to think about the suitability of the asset class/product in their portfolio form a risk-returns objective perspective," says Kaustubh Belapurkar, Director – Manager Research, Morningstar India. Many mutual fund advisors believe that investors who do not know much about tracking their funds and don't have help, should go for passive funds. These funds track their respective indices and hence do not need monitoring. "The most important thing to look at in an index fund is how well the fund is able to mirror / mimic its underlying portfolio in line with its benchmark keeping its tracking error as minimum as possible. Having a low expense ratio only reduces the overall cost but does not guarantee better performance and that the tracking error of the fund will be managed well. However, low expense ratio is indeed important but it should be the last thing investors should look at," says Rushabh Desai, an AMFI-registered mutual fund distributor, based out of Mumbai. Here's the list of lowest cost index funds available in the market: Fund name Expense ratio (%)ICICI Prudential Nifty Index Fund0.10ICICI Prudential Sensex Index Fund0.10Motilal Oswal Nifty 50 Index Fund0.10Axis Nifty 100 Index Fund0.15IDFC Gilt 2027 Index Fund0.15Nippon India Index Fund- Sensex Plan0.15Where the cost structure is lucrative, index funds have a much bigger basket of stocks to invest in compared to active schemes. This means lower risk but also lower returns. Indian market still has scope for a lot of good stock picking and alpha generation. Hence, mutual fund adviosrs believe that even though the cost gives passive funds an edge above active funds, the returns in the long run would be better in active funds. "Low cost passive options are great investment options for investors to take equity exposure. It is not a case of active vs passive, rather portfolio construction can be done including both active and passive funds. DIY investors can choose active fund if they have the wherewithal to pick a right mix of funds for their portfolio that matches their investment objectives. They should also have the patience and understanding to hold these funds over a market cycle. Investors who have the risk appetite for equity investing but not the wherewithal to pick active funds, could look to invest in suitable passive options," says Kaustubh Belapurkar. If you have a plan and want to add passive schemes to your mutual fund portfolio, here are the things that you should remember. Since these schemes just replicate the index returns, one should keep an eye on that part. There can be a tracking error in passive funds which is any deviation in the fund's return from the index return. If the standard deviation is minimum, you should chose a scheme with the lowest cost since all the schemes are replicating the index they follow.

from Economic Times https://ift.tt/2TmnRzy