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

Published: January 27, 2022 at 7:00 am

Last Updated on January 27, 2022 at 9:16 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.

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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.

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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