Axis Nifty 100 Index Fund Review: Replacement for active large cap funds?

Published: September 27, 2019 at 8:57 am

Last Updated on

Axis Nifty 100 Index Fund is an open-ended index that aims to achieve a return close to Nifty 100 subject to tracking error. The NFO opens today (Sept 27th to Oct 11th) and then will be available for continuous purchase. This is the first Nifty 100 (N100) index fund – we have N100 ETFs from ICICI and Reliance. The introduction of this index fund has some significance considering that, as of Dec 2018, Only Five Large Cap funds have comfortably beat Nifty 100! Hence the question, can Axis Nifty 100 Index Fund be a replacement for active large cap funds and even Nifty 50 and Next 50 combinations such as these: Combine Nifty  and Nifty Next 50 funds to create large, mid cap index portfolios

This is not some recent phenomena where active fund managers, especially those handling large cap funds, are struggling against the index. This was well known even in April 2010. See: This will change the way you invest: S&P Index Versus Active Funds report. This is the scheme information document of the fund at the SEBI site.

Questions to ask before investing in Axis Nifty 100 Index Fund

  1. Why should I choose an N100 index fund instead of a Nifty index fund? After all, because of free-float market cap weighting, both indices will have the same dominant stocks. The fifty additional shares from Nifty Next 50 will not have much weight in NIfty 100.
  2. Can a fund manager handle 100 stocks with a tracking error close to Nifty index funds?
  3. What is the expense ratio of Axis Nifty 100 Index Fund direct plan? Is it low enough? Will the AMC keep it that way?

We will know about the expense ratio only after it is available for continuous purchase. We will know about the tracking error only a few months later. Whether the AMC will keep the expense ratio low or make frequent changes will take longer to evaluate.

So even if the answer to question one is convincing yes, we still need to wait a while. There is no flaming hurry to invest during the NFO period. Let Axis bank customers do that in the regular plan.

Should I replace my active fund with index funds?

Only 14 out of 28 large cap funds fell less than N100 over every possible five year period tested from April 2006 with 70% or more consistency. This is the only USP of an active large cap fund, and that is badly missing. Even over the last year, only 8/21 managed a similar downside protection score. So indexing is the way to go in this space for sure. Data source: Sep 2019 Equity Mutual Fund Performance Screener

If you are wondering about the outperformance, then only 50% of the large cap funds were able to beat the Nifty 100 at least 70% of the five-year durations tested. So beating the Nifty or Nifty 100 has become (has been for a while) a coin-toss.

Therefore, there is effectively only one question to answer:

Should I use Nifty + Nifty Next 50 (if necessary) or should I use Nifty 100?

Why is the AMC launching an N100 index fund instead of focussing efforts on Axis Bluechip Fund (Review: Can this be used to beat Nifty?). My doubt (and it is only a doubt) is that AMCs are now targetting direct plan AUM from prominent robo advisors like Paytym, ETMoney etc

Nifty 100 vs Nifty 50

Let us now look at the rolling returns of Nifty 100 and NIfty 50 total return indices. This means that we shall compare every possible 3,5,7 and 10-year return durations.

First that over a year, you cannot tell the two indices apart. This changes.

Nifty 100 vs Nifty 50 Rolling Returns one year

Three years

Nifty 100 vs Nifty 50 Rolling Returns three years

Five years

Nifty 100 vs Nifty 50 Rolling Returns Five years

Seven years

Nifty 100 vs Nifty 50 Rolling Returns Seven years

Should you invest in Axis Nifty 100 Index Fund?

Before you get carried away by the “extra return” that Nifty 100  offers, please look at the horizontal axis window as the duration increases. The time window becomes shorter and shorter. This is because we have little data to work with. We cannot be sure if this will repeat in future.

That being said, it is worth considering Nifty 100 as a replacement for Nifty 50 or (80-90%) Nifty 50 and (20-10%) Nifty Next 50 combination. See: Combine Nifty & Nifty Next 50 funds to create large, mid cap index portfolios, provided Axis Nifty 100 Index Fund

  • has an acceptably low expense ratio
  • has an acceptably high AUM (the bank RMs should take care of that?)
  • has an acceptably low tracking error

Nifty 100 is undoubtedly a suitable replacement for active large cap funds. However, it will take at least six months for these to get established.  So I would strongly advise you to wait until that time. Naturally, a Nifty 100 index fund does not suffer from maintenance issues (rebalancing) and associated tax and exit loads, however, it should first deliver as an index fund.

Tracking 50 more stocks (compared to a Nifty index fund) will be at least 2X more challenging as the impact costs dramatically increase for Nifty Next 50 stocks: Warning! Even large cap stocks are not liquid enough! Can you handle this? Also, it would be worth pointing out that the largest equity active fund – Kotak Standard Multicap Fund (Review: Too much AUM, too soon?) – has only 52 stocks.

Now while we imagine the plight of Motilal Oswal Nifty 500 Fund( Review: Avoid & stick to Nifty 50 Index funds), let us give Axis Nifty 100 Index Fund some time to perform. Investors using Nifty 50 and Nifty Next 50 combinations can happily and peacefully continue investing. You are not missing out anything.

Endnote: Many investors assume lower expenses alone is enough to choose an index fund or ETF. Expense is only one of the several factors influence index fund/ETF tracking error. The more reliable way to judge is to compare returns of the index and the fund/ETF over different durations.  I am working a monthly report of index funds.  See ETFs vs Index Funds: Stop assuming lower expenses equals higher returns!

Check out these resources published in the last few days

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps