Navi US Total Stock Market Fund of Fund Review

Published: February 4, 2022 at 6:00 am

Last Updated on February 8, 2022

The Navi US Total Stock Market Fund of Fund will track the CRSP US Total Market Index by investing 95% to 100% of its assets in either the Vanguard Total Stock Market ETF (VTI) or the Schwab Total Stock Market Index Fund (SWTSX).

Assuming the AMC will choose the Vanguard Total Stock Market ETF (VTI) the total expense ratio of an investment in the fund will be 0.06% charged by NAVI plus 0.03% charged by the ETF. That is significantly less expensive than the 0.52% charged by Motilal Oswal for its S&P 500 fund (direct plan).

So does this mean Navi US Total Stock Market Fund of Fund is an “obvious buy”? Let us hold our horses, tone down our enthusiasm and consider the matter carefully.

Can I use Navi US Total Stock Market Fund of Fund for “international diversification”?

Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!

    🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

    When investors say they want diversification (of any nature), 99% of them just want a slice of something that is shiny. So in this context, it refers to the top few stocks of the US stock market. Most such investors are clueless about how to check the extent of portfolio diversification and will not regularly rebalance the portfolio fearing taxes. International equity funds do not enjoy the Rs. one lakh tax-free capital gain limit and are taxed about 6-8% higher than equity funds after indexation.

    Those who appreciate the pros and cons of diversification and associated responsibilities can consider international (US) equity funds.

    Will I get better diversification of the US stock market with Navi US Total Stock Market Fund of Fund than an S&P 500 passive fund?

    No. This is self-evident from the following screenshot from Google Finance comparing CRSP US Total Market Index (the benchmark for Navi US Total Stock Market Fund of Fund) vs S&P 500. This is because of market capitalization based weighting.

    Comparison of CRSP US Total Market Index vs S&P 500 - a screenshot from Google Finance
    Comparison of CRSP US Total Market Index vs S&P 500 – a screenshot from Google Finance

    Will Navi US Total Stock Market Fund of Fund have a lower tracking error than Motilal Oswal for its S&P 500 fund? 

    Tracking error is defined as the standard deviation of fund monthly return minus benchmark monthly return. As pointed out by Siva from AIFW (private communication), a fixed expense removed daily from the NAV will not contribute to the tracking error.

    Tracking error will be defined by the amount flowing into the fund and out of the fund and how efficiently the fund manager is able to buy and sell proportional ETF units via their broker during US market hours. It also depends on how efficiently USD-INR changes are tracked.

    So we do not if the Navi fund will have a lower tracking error.

    But Motilal Oswal needs to buy US stocks and manage them whereas Navi only has to buy a single ETF. Will this not make a difference to the tracking error?

    No, it need not. Take the case of Kotak’s Nasdaq 100 FoF. That invests in iShares NASDAQ 100 UCITS ETF with a TER of 0.33%. On top of this Kotak charges an additional 0.27%. So a total of 0.6%.

    Motilal Oswal charges a total of 0.68% for its Nasdaq 100 FOF (0.58% for the ETF + 0.1%).  Motilal manages the ETF in house.

    The tracking error since 1st March 2021 (soon after the Kotak fund launched) based on monthly returns is 1.69% for Kotak NASDAQ 100 FoF-(G)-Direct Plan and 1.56% for Motilal Oswal Nasdaq 100 FOF(G)-Direct Plan. So it is not “obvious” that a fund that “simply” invests in a US ETF will do better.

    Kotak Nasdaq 100 FOF vs ABSL Nasdaq 100 FOF vs Nasdaq 100 TRI in INR
    Kotak Nasdaq 100 FOF vs ABSL Nasdaq 100 FOF vs Nasdaq 100 TRI in INR

    Yes, Navi US Total Stock Market Fund of Fund has a lot of good things going for it. One of the best in class underlying funds with low fees and therefore the FOF also has low fees. On that basis, it is certainly not a bad buy. However, it would be a mistake to assume it is the superior choice without data.

    Will I not get better more returns from Navi US Total Stock Market Fund of Fund because of low fees?

    That depends on the tracking error. In the above example, the more expensive Motilal Fund has marginally outperformed the Kotak fund to date. Again it is good that Navi has a low fee to begin with. So even with a high tracking error outperformance is possible. However, the proof of the pudding is in the NAV movement.

    Krishnakumar Chandrasekaran on AIFW clarified the following on dividend taxation: When US companies pay dividends to US ETF/mutual fund, there is no tax withheld. The ETF/MF passes on the dividend on a quarterly basis. US residents pay tax on dividends at the applicable rate while for Indian FOF dividend is passed on after 25% withholding tax. In case an Indian fund invests directly in US companies, the dividend paid by each company is received after 25% withholding tax. In both cases, there is only one level of withholding tax.

    Furthermore, Krishnakumar adds that the US ETFs will also need to pass on capital gains to investors! This has no withholding tax like dividends but the FOF will have to reinvest them and can contribute to the tracking error. These gains though small (due to low churn) can make a difference over several years.

    What about the limitations on overseas investments? Will not affect FOFs investing in international ETFs?

    We have discussed this detail a few days ago: Can I now invest in Fund of Funds that buy US ETFs?

    In the case of funds investing in international ETFs, the current limit per fund limit is just $300 million! This is less than Rs. 2300 Crores! Residents investing abroad is a tricky issue involving the govt, RBI and SEBI.

    While everyone hopes that the limit for investing in international stocks will soon be enhanced (from 1 Billion USD and 7 Billion USD industry-wide), the limit for investing in international ETFs may not be immediately increased as that is not in any danger of being breached (USD $300 million per Mutual Fund, within the overall industry limit of US $1 billion).

    So sooner than later the limit for international ETFs will also be breached and will start the waiting game again. Also, the govt may consider increasing the tax on such funds.

    In summary, Navi US Total Stock Market Fund of Fund is a good offering but it should only be considered by those who understand the pros and cons of including such a fund in the portfolio.

    For example, if you wish to “diversify” your equity portfolio with say 20% of US stocks, then you will have to regularly rebalance to maintain it at 20% without worrying about paying tax.

    The US market is not a bed of roses. The coming year with the expected rate hikes may not be productive. Investors must appreciate the risks involved. See: Motilal Oswal S&P 500 Index Fund: What return can I expect from this?

    As with all acceptable NFOs, we recommend waiting and watching the tracking error for at least a few months by which time we will also have some clarity on the revised overseas investment limits.

    We would like to caution those who invest either now or later not to feel superior about their choice. The ups and downs of tracking an international index can throw up some surprises that defy intuition or commonsense.

    Do share this article with your friends using the buttons below.

    🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥
    Use our Robo-advisory Excel Tool for a start-to-finish financial plan! More than 1000 investors and advisors use this!
    New Tool! => Track your mutual funds and stocks investments with this Google Sheet!
    • Follow us on Google News.
    • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
    • Join our YouTube Community and explore more than 1000 videos!
    • Have a question? Subscribe to our newsletter with this form.
    • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

    Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!

      Explore the site! Search among our 2000+ articles for information and insight!

      About The Author

      Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
      Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
      Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
      Our new book for kids: “Chinchu gets a superpower!” is now available!
      Both boy and girl version covers of Chinchu gets a superpower
      Both boy and girl version covers of Chinchu gets a superpower.
      Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
      Feedback from a young reader after reading Chinchu gets a Superpower (small version)
      Feedback from a young reader after reading Chinchu gets a Superpower!
      Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
      Buy the book: Chinchu gets a superpower for your child!
      How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
      Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
      We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
      About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (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 paid articles, promotions, 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 and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
      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 a low cost! Get it or gift it to a young earner.

      Your Ultimate Guide to Travel

      Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and 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 300 (instant download)