Nifty Bees ETF vs UTI Nifty Index Fund: Which is better?

Published: November 27, 2022 at 6:00 am

A reader asks, “I cannot decide between Nippon India Nifty 50 Bees ETF and UTI Nifty 50 Index Fund. The ETF has a total expense ratio of 0.05%, while the index fund’s TER is 0.2%. My friends tell me that ETF is bound to outperform the index fund over the long term and that choosing the ETF is a no-brainer. However, you repeatedly keep asking us to avoid ETFs. Can you please advise what to do?”

Your question reminds me of a line from the movie the Prestige. Hugh Jackman’s character says, “price is not an object.” David Bowie’s character (Nikola Tesla) responds, “Perhaps not, but have you considered the cost?” Yes, the price of investing in an ETF is much lower than that of an index fund, but what about the cost?

Unlike an index fund, an ETF trades like a stock (only high-net-worth individuals can buy and sell off the market). Therefore the NAV of an ETF is not relevant for tracking errors or returns. Only the market price matters.

The price of an ETF should ideally follow the NAV of an ETF. It can trade above/below the NAV for a few days, but an AMC-authorized participant reduces this difference via arbitrage.

However, when there is a supply-demand mismatch due to sudden positive or negative developments, the ETF price can significantly deviate from the NAV. The true cost of investing in an ETF is this price-NAV deviation.


Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

Very few ETFs in India consistently keep this NAV-price deviation in check. Very few ETFs in India see active trading. A large AUM or active trading are not prerequisites for low-NAV price deviations.

If we compare the price of Nifty Bees (not NAV, never NAV!) with UTI Nifty, which would come out on top? Many would expect the ETF to win, but that is not necessarily the case.

Suppose a fund’s expense ratio is the only reason for deviating from the index, the tracking error will be zero. This is because a fixed amount is deducted from the NAV of the ETF/ index fund, and therefore the relative volatility wrt the benchmark is zero.

The main sources of tracking error in an index are the AUM in and outflow, the impact costs of stocks  (buy vs sell price deviation when sold in bulk) and corporate actions of stocks (dividends, splits etc.) This is particularly notorious in small AUM index funds. See: These five index funds beat their indices! Why you should avoid them!

An ETF also suffers from all these issues. In addition, it suffers from demand vs supply in its investors’ pool. Then there is the authorized participant who would only efficiently reduce price-NAV deviation when there is enough arbitrage incentive.

Therefore even before we compare the returns, it is clear that an index fund is the simpler choice, but would the higher expense ratio makes a difference to the returns?

The 1y, 3Y and 5Y rolling returns based on ETF price and index fund NAV are shown below. The date range is from Aug 2nd 2016, to Sep 30th 2022.

1Y rolling returns of Nippon India Nifty 50 Bees ETF price vs UTI Nifty 50 Direct Plan Growth Option NAV
1Y rolling returns of Nippon India Nifty 50 Bees ETF price vs UTI Nifty 50 Direct Plan Growth Option NAV
3Y rolling returns of Nippon India Nifty 50 Bees ETF price vs UTI Nifty 50 Direct Plan Growth Option NAV
3Y rolling returns of Nippon India Nifty 50 Bees ETF price vs UTI Nifty 50 Direct Plan Growth Option NAV
5Y rolling returns of Nippon India Nifty 50 Bees ETF price vs UTI Nifty 50 Direct Plan Growth Option NAV
5Y rolling returns of Nippon India Nifty 50 Bees ETF price vs UTI Nifty 50 Direct Plan Growth Option NAV

Over 1 and 3 years, the difference is negligible. Over five years, the ETF edges up with an average higher return of 0.24%. The median return is also the same (to two decimals). Please note that 5Y data is only over a year (see the range of the X-axis shrink from 1 to 5 years).

Assuming both passive funds are just as efficient in tracking the index (given their specific circumstances), the ETF has a small edge originating, possibly because of the higher expense ratio of the index fund. In May 2021, the UTI fund doubled its expense ratio from 0.1% in March 2021 to 0.2%. For its part, the ETF has had a steady expense ratio of 0.05% only from July 2019. Before that, it was as expensive as the UTI fund (0.1%); before May 2017, the ETF was more expensive.

Historical total expense ratios of Nifty 50 Bees ETF and UTI Nifty 50 Direct Plan Growth Option
Historical total expense ratios of Nifty 50 Bees ETF and UTI Nifty 50 Direct Plan Growth Option

ETF or index fund, a simple thumb rule is when the expense ratio decreases, the fund house wants AUM and when it increases, the fund house wants to profit from the AUM increase and expects the inflow to be steady.

There is one catch to buying an ETF, though. A demat account is necessary, with its own one-time and recurring costs (brokerage and maintenance fee). So this would further narrow the gap in the five-year returns.

In summary, although Nippon India Nifty 50 Bees ETF is an excellent performer, the UTI Nifty 50 Index Fund is just as good and is the simpler choice for long-term investing. That said, experienced investors who can navigate the ETF price volatility can certainly consider Nifty Bees.

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

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.

  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter with the form below.
  • 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.

Join over 32,000 readers and get free money management solutions delivered to your inbox! 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 ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, 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 3,000 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 the 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 is 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 get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & it's 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 with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will 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)