There is no need for investors to consider the two new index from DSP: DSP Nifty 50 Index Fund & DSP Nifty Next 50 Index Fund as there are good existing options. Amusingly, in its promotional campaign DSP has admitted that beating the market will be tougher in future! We should avoid a new index fund even with a low expense ratio unless its AUM is large enough. Alternatives are discussed.
DSP Nifty 50 Index Fund will track the top 50 stocks in the NSE by free float market capitalization. This will be a true large cap index. DSP Nifty Next 50 Index Fund will track the next 50 stocks in terms of market cap. Although the top 100 stocks are “defined” to be large cap stocks, we have clearly shown and many investors would have had first-hand experience that the Nifty Next 50 is not a large cap index. Its risk and reward profile is more like a mid cap index and investors need to be cautious of this.
In its NFO campaign DSP has admitted that index funds are relevant today for two reasons:
Introduction of SEBI re categorization which has confined the universe for active large cap fund managers
Introduction of TRI indices
The promotional pamphlet also points out to the over 4% reduction in average alpha from 2000-2009 to 2010-2018 when three-year and five year rolling return periods are considered. This kind of promotion is like shooting themselves on the foot since their main source of income (assuming they are profitable) is from active funds. So their slogan for this NFO launch is meet the market first then try to beat it!!
DSP must be pinning its hope on distribution “partners” to push the regular plans of these index funds (like UTI did when it launched Nifty Next 50). You can check this out when AMFI releases average AUM data next quarter. Also see: Which are the most popular direct plan mutual funds?
Why avoid DSP Nifty 50 Index Fund & DSP Nifty Next 50 Index Fund?
Readers may recall that we had recently shown five NSE and Sensex index funds that beat their indices and cautioned investors to avoid them. Amusingly, some of these funds had high expense ratios and still beat the index as they could not efficiently track the index portfolios. The main result is reproduced below for convenience.
Notice that these “outperformers” all have low AUMs making it difficult for the fund manager to manage inflows and outflow and still retain similarity with the index.
This is the main reason to avoid DSP Nifty 50 Index Fund & DSP Nifty Next 50 Index Fund or all NFO index funds. Let them first list and accumulate at least 500+ crores of AUM. Then we look at the returns over a year at least, check that with the index and then consider. Tracking errors or low expense ratio does not mean much. Actual point-to-point performance of the fund vs its index matters.
Which Nifty 50 index fund to choose?
First of all, avoid all ETFs. As mentioned before – Interested in ETFs? Here is how you can select ETFs by checking how easy it is buy/sell them – they suffer from NAV-price differences and not worth the trouble.
The choice is simple. UTI Nifty 50 Index fund. It has an AUM of 1000+ Crores, an expense ratio of 0.1% (Direct plan) and over nearly 6 years managed to keep the difference in return wrt Nifty 50 reasonably low. Source: Value Research.
|NIFTY 50 Total Return||2.17||3.87||17.18||13.87|
Which Nifty Next 50 index fund to choose?
We have already discussed this in detail see:
- ICICI Nifty Next 50 Index Fund vs Reliance ETF Junior BeEs
- What is the best way to invest in Nifty Next 50 Index?
Current there is only about 0.05% difference in expense ratio between the direct plans of ICICI and UTI Nifty Next 50 funds. The difference in AUM (~ 70+ Crores is also fast narrowing. So investors can choose either.
To summarize, I recommend that investors avoid DSP Nifty 50 Index Fund & DSP Nifty Next 50 Index Fund or any other index NFO and consider existing options. It is unknown how successful DSP’s campaign would be and the NFOs could list with just 20-30 Crores of AUM making the fund susceptible to huge tracking errors.
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