These index funds and ETFs are as expensive as active funds!

Published: January 27, 2022 at 7:00 am

The absence of fund manager risk and lower fees are the two main reasons for choosing passive funds (index funds or ETFs). However, beyond the “normal” Sensex and Nifty passive funds, the remaining choices in this segment are quite expensive and comparable to the costs of active funds. Investors must be wary of this or it would eat into their returns and risk premiums.

Even a casual observer of mutual funds would recognise that the number of ETFs and index funds have increased considerably. There are two reasons for this: The number of demat accounts has increased considerably over the last few years and the SEBI Mutual Fund Categorization rules allow an unlimited number of passive funds (thematic funds and fund of funds) per fund house but only one fund in other categories.

This means the passive fund basket will include more fanciful indices – smart-beta funds, factor-based funds etc. The underlying indices have a short history (much of it backtested) and are usually “designed” to beat a market capitalization-weighted index like the Nifty or Sensex in the past. See: Data Mining in Index Construction: Why Investors need to be cautious.

This way, the index curator can charge the fund house a premium. The fund house in turn charges the investor a much higher amount. The investor is happy to pay because he takes the backtest too seriously and believes he will get something “extra” from these funds.

These funds may beat Sensex or Nifty from time to time but are unlikely to do so all the time. While gets nominal gain/loss until redeemed, the fund house happily pockets the significantly higher fee in real terms on a daily basis.  Let us now consider some examples.

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    Nifty Next 50 index funds cost 0.3% to 0.33%. This is at least three times the cost of a typical Nifty/Sensex index fund. What is the justification for this other than AMC profit? The Nifty Next 50 has underperformed Nifty/Sensex for a few years now – the higher expense ratio has made it worse.

    On another note: UTI Nifty fund TER was 0.1% in March 2021. Today it is twice that! This is a classic dump and pump strategy – bait investors with low fees to dump their money and then pump up the TER.

    HDFC NIFTY50 Equal Weight Index Fund(G)-Direct Plan costs 0.4%. That is at least four times more expensive than a Nifty fund with the same stocks!  Sure a little more effort is necessary for handling inflows and outflows in an equal-weighted fund but it is not as if the fund manager accounts for it by hand! This makes it that much harder to beat a market-cap-weighted index – why else would one invest in these!

    Other examples with the same reasoning include:

    • Motilal Oswal Nifty 500 Fund(G)-Direct Plan costs 0.39% – Nifty 500 will not beat Nifty 50 if mid caps and small caps struggle (like for instance from early 2018 to March 2020)
    • UTI Nifty200 Momentum 30 Index Fund(G)-Direct Plan costs 0.39% – considering that such a fund will struggle when there is no momentum in the market, this is a big fee. See: UTI Nifty200 Momentum 30 Index Fund: Who should invest?
    • ICICI Prudential Nifty Low Vol 30 ETF costs a whopping 0.42%. This is bizarre!
    • Nippon India ETF Infra BeES costs 1.08% – “The low AUM hence higher cost” does not make sense because the higher cost will only deter further inflow.
    • Nippon India ETF Shariah BeES costs 1.03%

    These numbers are comparable with several active funds (see table below). It must be understood that the active fund themselves may have lowered TER as part of a dump and pump strategy.

    If this is the situation when ETFs only account for about 10% and index funds only about 1% of the total assets under management, I shudder to think how much TERs would increase when they become more popular!

    AMCs would always get away with higher TERs with the argument that they are “relatively lower” than (some) active funds.

    The situation today: Investors are forced to pay higher fees and suffer through high tracking errors. See: Not all index funds are the same! Beyond top 100 stocks tracking errors are huge!

    Many naive investors claim that a fund house like NAVI is the answer to this. It must be appreciated that a new fund house like NAVI is eagerly trying to increase its market share and the low TER is a juicy bait. How they behave if profits increase or do not increase is unknown, to say the least. Active funds or passive funds, investors should not get married to a fund house and become brand advocates for free when all they have to work with is an opinion!

    Yes, choosing a passive fund with the lowest TER and reasonable AUM is the way to begin but the TER does not stay low for long! Not an ideal situation, but there it is.

    TER comparison of Index funds, ETFs and select active funds

    The TER as of Dec 31st 2021 is listed below for index funds, ETFs and a few active funds with comparable TER. We can expect funds that invest in international stocks to have a higher fee but how much of an increase is justified is subject to debate.

    CategoryScheme NameExp. Ratio
    Large Cap FundUTI Mastershare-Direct Plan1.090
    Small cap FundHSBC Small Cap Equity Fund(G)-Direct Plan1.090
    ETFs – OtherNippon India ETF Infra BeES1.080
    Large Cap FundICICI Pru Bluechip Fund(G)-Direct Plan1.080
    Large Cap FundAditya Birla SL Frontline Equity Fund(G)-Direct Plan1.050
    Multi Cap FundICICI Pru Multicap Fund(G)-Direct Plan1.040
    ETFs – OtherNippon India ETF Shariah BeES1.030
    Mid Cap FundSBI Magnum Midcap Fund(G)-Direct Plan1.030
    Small cap FundFranklin India Smaller Cos Fund(G)-Direct Plan1.030
    Flexi Cap FundUTI Flexi Cap Fund-Direct Plan0.920
    Index – NiftyTaurus Nifty Index Fund(G)-Direct Plan0.910
    Large & Mid CapSundaram Large and Mid Cap Fund(G)-Direct Plan0.900
    ETFs – OtherNippon India ETF Hang Seng BeES0.860
    Flexi Cap FundSBI Flexicap Fund(G)-Direct Plan0.860
    Flexi Cap FundParag Parikh Flexi Cap Fund(G)-Direct Plan0.810
    Flexi Cap FundKotak Flexicap Fund(G)-Direct Plan0.640
    Index Funds – OtherSundaram Nifty 100 Equal Weight Fund(G)-Direct Plan0.640
    Large & Mid CapKotak Equity Opp Fund(G)-Direct Plan0.620
    Mid Cap FundInvesco India Midcap Fund(G)-Direct Plan0.620
    ETFs – OtherMirae Asset S&P 500 Top 50 ETF0.600
    ETFs – OtherMotilal Oswal Nasdaq 100 ETF0.580
    Small cap FundIDFC Emerging Businesses Fund(G)-Direct Plan0.540
    ETFs – OtherMirae Asset NYSE FANG+ ETF0.530
    IndexNippon India ETF Nifty 1000.530
    Mid Cap FundKotak Emerging Equity Fund(G)-Direct Plan0.530
    Multi Cap FundITI Multi-Cap Fund(G)-Direct Plan0.500
    IndexKotak PSU Bank ETF0.490
    IndexNippon India ETF PSU Bank BeES0.490
    Small cap FundKotak Small Cap Fund(G)-Direct Plan0.490
    IndexICICI Pru Nifty 100 ETF0.470
    Index Funds – OtherEdelweiss MSCI India Domestic & World Healthcare 45 Index Fund(G)-Direct Plan0.440
    Flexi Cap FundNavi Flexi Cap Fund(G)-Direct Plan0.430
    ETFs – OtherMirae Asset Hang Seng TECH ETF0.420
    IndexICICI Pru Nifty Low Vol 30 ETF0.420
    ETFs – OtherICICI Pru Alpha Low Vol 30 ETF0.410
    IndexKotak Nifty Alpha 50 ETF0.400
    Index – NiftyDSP Equal Nifty 50 Fund(G)-Direct Plan0.400
    Index Funds – OtherHDFC NIFTY50 Equal Weight Index Fund(G)-Direct Plan0.400
    Mid Cap FundPGIM India Midcap Opp Fund(G)-Direct Plan0.400
    Flexi Cap FundPGIM India Flexi Cap Fund(G)-Direct Plan0.390
    Index Funds – OtherMotilal Oswal Nifty 500 Fund(G)-Direct Plan0.390
    Index Funds – OtherUTI Nifty200 Momentum 30 Index Fund(G)-Direct Plan0.390
    Multi Cap FundHDFC Multi Cap Fund(G)-Direct Plan0.390
    Index Funds – OtherMotilal Oswal Nifty Bank Index Fund(G)-Direct Plan0.380
    Large Cap FundCanara Rob Bluechip Equity Fund(G)-Direct Plan0.380
    Flexi Cap FundNippon India Flexi Cap Fund(G)-Direct Plan0.370
    Index – SensexLIC MF Index Fund-Sensex Plan(G)-Direct Plan0.370
    IndexNippon India ETF NV200.360
    Small cap FundAxis Small Cap Fund(G)-Direct Plan0.360
    ETFs – OtherNippon India ETF Consumption0.350
    IndexIDFC Sensex ETF0.350
    Index – Nifty Next 50L&T Nifty Next 50 Index Fund(G)-Direct Plan0.350
    Small cap FundTata Small Cap Fund(G)-Direct Plan0.350
    Index Funds – OtherEdelweiss Large & Midcap Index Fund(G)-Direct Plan0.340
    Large & Mid CapNavi Large & Midcap Fund(G)-Direct Plan0.340
    IndexAxis Consumption ETF0.330
    Index – Nifty Next 50UTI Nifty Next 50 Index Fund(G)-Direct Plan0.330
    Index – Nifty Next 50IDBI Nifty Junior Index Fund(G)-Direct Plan0.320
    Index – Nifty Next 50Kotak Nifty Next 50 Index Fund(G)-Direct Plan0.320
    Index – Nifty Next 50Motilal Oswal Nifty Next 50 Index Fund(G)-Direct Plan0.320
    Large Cap FundITI Large Cap Fund(G)-Direct Plan0.320
    Mid Cap FundITI Mid Cap Fund(G)-Direct Plan0.320
    Small cap FundITI Small Cap Fund(G)-Direct Plan0.320
    Index Funds – OtherMotilal Oswal Nifty Smallcap 250 Index Fund(G)-Direct Plan0.310
    IndexDSP Nifty 50 Equal Weight ETF0.300
    Index – NiftyFranklin India Index Fund-NSE Nifty(G)-Direct Plan0.300
    Index – Nifty Next 50DSP NIFTY Next 50 Index Fund(G)-Direct Plan0.300
    Index – Nifty Next 50HDFC NIFTY Next 50 Index Fund(G)-Direct Plan0.300
    Index – Nifty Next 50ICICI Pru Nifty Next 50 Index Fund(G)-Direct Plan0.300
    Index Funds – OtherICICI Pru Smallcap Index Fund(G)-Direct Plan0.300
    Index Funds – OtherNippon India Nifty Smallcap 250 Index Fund(G)-Direct Plan0.300
    Large Cap FundNavi Large Cap Equity Fund(G)-Direct Plan0.300
    Multi Cap FundAxis Multicap Fund(G)-Direct Plan0.300
    IndexDSP Nifty Midcap 150 Quality 50 ETF0.290
    IndexICICI Pru S&P BSE 500 ETF0.290
    Index – NiftyAditya Birla SL Nifty Smallcap 50 Index Fund(G)-Direct Plan0.290
    Index – SensexTata Index Fund-Sensex Plan(G)-Direct Plan0.290
    Index Funds – OtherAditya Birla SL Nifty Midcap 150 Index Fund(G)-Direct Plan0.290
    IndexKotak Sensex ETF0.280
    IndexLIC MF ETF-Nifty 1000.280
    Small cap FundUTI Small Cap Fund(G)-Direct Plan0.280
    Index – NiftyIDBI Nifty Index Fund(G)-Direct Plan0.270
    Index Funds – OtherEdelweiss Nifty 100 Quality 30 Index Fund(G)-Direct Plan0.270
    Index – NiftyL&T Nifty 50 Index Fund(G)-Direct Plan0.250
    IndexNippon India ETF Nifty Midcap 1500.230
    IndexNippon India ETF Sensex Next 500.230
    ETFs – OtherAxis Technology ETF0.220
    IndexAxis Healthcare ETF0.220
    IndexKotak IT ETF0.220
    IndexNippon India ETF Nifty IT0.220
    Index – NiftyDSP NIFTY 50 Index Fund(G)-Direct Plan0.220
    Multi Cap FundKotak Multicap Fund(G)-Direct Plan0.220
    Small cap FundPGIM India Small Cap Fund(G)-Direct Plan0.220
    IndexNippon India Nifty Pharma ETF0.210
    Index – NiftyLIC MF Index Fund-Nifty Plan(G)-Direct Plan0.210
    Index Funds – OtherMotilal Oswal Nifty Midcap 150 Index Fund(G)-Direct Plan0.210
    ETFs – OtherICICI Pru Consumption ETF0.200
    IndexICICI Pru FMCG ETF0.200
    IndexICICI Pru IT ETF0.200
    IndexMotilal Oswal Midcap 100 ETF0.200
    IndexSBI-ETF Nifty Bank0.200
    IndexSBI-ETF Nifty Next 500.200
    Index – NiftyAditya Birla SL Nifty 50 Index Fund(G)-Direct Plan0.200
    Index – NiftyHDFC Index Fund-NIFTY 50 Plan(G)-Direct Plan0.200
    Index – NiftyNippon India Index Fund – Nifty Plan(G)-Direct Plan0.200
    Index – NiftyUTI Nifty Index Fund -Direct Plan0.200
    Index – SensexHDFC Index Fund-Sensex(G)-Direct Plan0.200
    Index Funds – OtherICICI Pru Midcap 150 Index Fund(G)-Direct Plan0.200
    Index Funds – OtherNippon India Nifty 50 Value 20 Index Fund(G)-Direct Plan0.200
    Index Funds – OtherNippon India Nifty Midcap 150 Index Fund(G)-Direct Plan0.200
    Large Cap FundSundaram Large Cap Fund(G)-Direct Plan0.200
    Multi Cap FundAditya Birla SL Multi-Cap Fund(G)-Direct Plan0.200
    ETFs – OtherNippon India ETF Dividend Opportunities0.190
    ETFs – OtherNippon India ETF Bank BeES0.180
    IndexKotak Banking ETF0.180
    Index – NiftyKotak Nifty 50 Index Fund(G)-Direct Plan0.180
    ETFs – OtherNippon India ETF Junior BeES0.170
    Index – NiftyICICI Pru Nifty Index Fund(G)-Direct Plan0.170
    Index – NiftyIDFC Nifty Fund(G)-Direct Plan0.170
    Index – NiftySBI Nifty Index Fund(G)-Direct Plan0.170
    DebtLIC MF G-Sec LT ETF-(G)0.160
    IndexAditya Birla SL Banking ETF0.160
    IndexAxis Banking ETF0.160
    IndexHDFC Banking ETF0.160
    Index – NiftyTata Index Fund-Nifty Plan(G)-Direct Plan0.160
    Index – SensexICICI Pru Sensex Index Fund(G)-Direct Plan0.160
    DebtNippon India ETF Nifty CPSE Bond Plus SDL – 2024 Maturity0.150
    DebtNippon India ETF Nifty SDL – 2026 Maturity0.150
    ETFs – OtherICICI Pru Bank ETF0.150
    ETFs – OtherICICI Pru Midcap Select ETF0.150
    ETFs – OtherICICI Pru Pvt Banks ETF0.150
    Flexi Cap FundMahindra Manulife Flexi Cap Yojana(G)-Direct Plan0.150
    IndexICICI Pru Healthcare ETF0.150
    IndexICICI Pru Midcap 150 ETF0.150
    Index – NiftyEdelweiss Nifty 50 Index Fund(G)-Direct Plan0.150
    Index – SensexNippon India Index Fund – Sensex Plan(G)-Direct Plan0.150
    Index Funds – OtherAxis Nifty 100 Index Fund(G)-Direct Plan0.150
    DebtMotilal Oswal 5 Year G-Sec ETF0.140
    IndexKotak NV 20 ETF0.140
    IndexMirae Asset Nifty Next 50 ETF0.140
    IndexSBI-ETF BSE 1000.140
    IndexTata Nifty Pvt Bank ETF0.140
    DebtAxis AAA Bond Plus SDL ETF – 2026 Maturity0.130
    IndexMirae Asset Nifty Financial Services ETF0.130
    IndexEdelweiss ETF – Nifty Bank0.120
    IndexICICI Pru NV20 ETF0.120
    IndexIndiabulls Nifty 50 ETF0.120
    IndexKotak Nifty ETF0.120
    Flexi Cap FundICICI Pru Flexicap Fund(G)-Direct Plan0.110
    DebtNippon India ETF Long Term Gilt0.100
    IndexICICI Pru Nifty Next 50 ETF0.100
    IndexInvesco India Nifty ETF0.100
    IndexLIC MF ETF-Nifty 500.100
    IndexLIC MF ETF-Sensex0.100
    Index – NiftyAxis Nifty 50 Index Fund(G)-Direct Plan0.100
    Index – NiftyMotilal Oswal Nifty 50 Index Fund(G)-Direct Plan0.100
    IndexQuantum Nifty ETF0.094
    DebtNippon India ETF 5 Year Gilt0.090
    IndexAditya Birla SL Sensex ETF0.080
    IndexIDFC Nifty ETF0.080
    IndexMirae Asset Nifty 50 ETF0.080
    IndexTata Nifty ETF0.080
    IndexAxis Nifty ETF0.070
    IndexDSP Nifty 50 ETF0.070
    IndexSBI-ETF Nifty 500.070
    IndexSBI-ETF Sensex0.070
    IndexNippon India ETF Sensex0.060
    Index – NiftyNavi Nifty 50 Index Fund(G)-Direct Plan0.060
    ETFs – OtherBharat 22 ETF0.050
    ETFs – OtherMotilal Oswal M50 ETF0.050
    IndexAditya Birla SL Nifty ETF0.050
    IndexAditya Birla SL Nifty Next 50 ETF0.050
    IndexHDFC Nifty 50 ETF0.050
    IndexHDFC Sensex ETF0.050
    IndexICICI Pru Nifty ETF0.050
    IndexICICI Pru Sensex ETF0.050
    IndexNippon India ETF Nifty BeES0.050
    ETFs – OtherCPSE ETF0.010
    DebtBHARAT Bond ETF – April 20230.001
    DebtBHARAT Bond ETF – April 20250.001
    DebtBHARAT Bond ETF – April 20300.001
    DebtBHARAT Bond ETF – April 20310.001
    DebtBHARAT Bond ETF – April 20320.001


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