Last Updated on December 29, 2021
Nippon India Passive Flexicap FoF is an open-ended Fund of Funds (FoF) Scheme investing in units of ETFs/Index Funds of Nippon India Mutual Fund. In this review, we consider if it makes sense to invest in such a product.
The FoF was launched in Dec 2020 and currently has an AUM of 212 crores (as of 31st July 2021). The directly plan currently has an expense ratio of 0.06% over and above the expensed ratios of the underlying funds.
Nippon India Passive Flexicap FoF has a broad investment mandate. It can invest 95 – 100% units of Nippon India ETFs/ Index Fund of Nippon India Mutual Fund. The scheme information document says that the asset allocation among these underlying funds will be based on the average allocation of all active Multicap Funds in the industry into large, mid and small cap stocks as provided by CRISIL every month. The rebalancing will also be done monthly.
On the face of it, this looks like a good one-fund portfolio product at a low cost. That is, you don’t need to buy large cap, mid cap and small cap index funds. However, as always, deeper scrutiny paints a different picture.
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The portfolio holdings of Nippon India Passive Flexicap FoF since inception is tabulated below.
| Month | Nippon India ETF Nifty 100 | Nippon India ETF Nifty Midcap 150 | Nippon India Nifty Smallcap 250 Index Fund |
| Jul-21 | 67.53 | 22.83 | 9.96 |
| Jun-21 | 69.05 | 20.63 | 9.70 |
| May-21 | 69.60 | 19.95 | 9.78 |
| Apr-21 | 42.48 | 27.24 | 29.51 |
| Mar-21 | 43.35 | 27.22 | 27.96 |
| Feb-21 | 44.36 | 26.30 | 26.66 |
| Jan-21 | 42.17 | 29.53 | 26.68 |
As of July 31st 2021, Nippon India ETF Nifty 100 only has assets of 165 crores. So Nippon India Passive Flexicap FoF is holding 68% of this AUM! Even a casual glance at the Nifty 100 ETFs, Value Research page would reveal significant price-nav deviations.
If the influx into the FoF is large, the AMC will direly buy ETF units at its NAV. However, the influx on most days would be unremarkable, and therefore the FOF will be buying ETF units at market price.
Then the tracking errors have to be considered. We have already pointed out that (1) ETF tracking errors have to be measured wrt price and not NAV. For example, the ETF price return (absolute) bet Jan 4th 2021 and Sep 3rd 2021 is 31.50%, while the change in NAV is 23.84% and the change in NIfty 100 TRI is 24.40%. Nippon India Passive Flexicap FoF is susceptible to this tracking error. Also, see ETFs vs Index Funds: Stop assuming lower expenses equals higher returns!
(2) We have also pointed out that the tracking errors for midcap and smallcap index funds or ETFs can be quite high: Not all index funds are the same! Beyond top 100 stocks tracking errors are huge! Over the past nine months, the MIdcap ETFs NAV return was 05% lower than its index. The ETF price return is likely to have a higher deviation. The Smallcap index fund lost 1.75% compared to its index due to tracking error.
Nippon India Passive Flexicap FoF seems more like a channel to gather some AUM for the underlying ETFs and index funds than a reasonable investment option. Even if we ignore the 0.06% expense ratio of the FOF direct plan, the underlying funds’ price-NAV deviations and tracking errors are enough reasons to avoid this.
We, therefore, recommend that investors avoid the Nippon India Passive Flexicap FoF and any other midcap or small cap passive options. They are better off combining Nifty & Nifty Next 50 funds to create large, mid cap index portfolios.
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