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.
| Category | Scheme Name | Exp. Ratio |
| Large Cap Fund | UTI Mastershare-Direct Plan | 1.090 |
| Small cap Fund | HSBC Small Cap Equity Fund(G)-Direct Plan | 1.090 |
| ETFs – Other | Nippon India ETF Infra BeES | 1.080 |
| Large Cap Fund | ICICI Pru Bluechip Fund(G)-Direct Plan | 1.080 |
| Large Cap Fund | Aditya Birla SL Frontline Equity Fund(G)-Direct Plan | 1.050 |
| Multi Cap Fund | ICICI Pru Multicap Fund(G)-Direct Plan | 1.040 |
| ETFs – Other | Nippon India ETF Shariah BeES | 1.030 |
| Mid Cap Fund | SBI Magnum Midcap Fund(G)-Direct Plan | 1.030 |
| Small cap Fund | Franklin India Smaller Cos Fund(G)-Direct Plan | 1.030 |
| Flexi Cap Fund | UTI Flexi Cap Fund-Direct Plan | 0.920 |
| Index – Nifty | Taurus Nifty Index Fund(G)-Direct Plan | 0.910 |
| Large & Mid Cap | Sundaram Large and Mid Cap Fund(G)-Direct Plan | 0.900 |
| ETFs – Other | Nippon India ETF Hang Seng BeES | 0.860 |
| Flexi Cap Fund | SBI Flexicap Fund(G)-Direct Plan | 0.860 |
| Flexi Cap Fund | Parag Parikh Flexi Cap Fund(G)-Direct Plan | 0.810 |
| Flexi Cap Fund | Kotak Flexicap Fund(G)-Direct Plan | 0.640 |
| Index Funds – Other | Sundaram Nifty 100 Equal Weight Fund(G)-Direct Plan | 0.640 |
| Large & Mid Cap | Kotak Equity Opp Fund(G)-Direct Plan | 0.620 |
| Mid Cap Fund | Invesco India Midcap Fund(G)-Direct Plan | 0.620 |
| ETFs – Other | Mirae Asset S&P 500 Top 50 ETF | 0.600 |
| ETFs – Other | Motilal Oswal Nasdaq 100 ETF | 0.580 |
| Small cap Fund | IDFC Emerging Businesses Fund(G)-Direct Plan | 0.540 |
| ETFs – Other | Mirae Asset NYSE FANG+ ETF | 0.530 |
| Index | Nippon India ETF Nifty 100 | 0.530 |
| Mid Cap Fund | Kotak Emerging Equity Fund(G)-Direct Plan | 0.530 |
| Multi Cap Fund | ITI Multi-Cap Fund(G)-Direct Plan | 0.500 |
| Index | Kotak PSU Bank ETF | 0.490 |
| Index | Nippon India ETF PSU Bank BeES | 0.490 |
| Small cap Fund | Kotak Small Cap Fund(G)-Direct Plan | 0.490 |
| Index | ICICI Pru Nifty 100 ETF | 0.470 |
| Index Funds – Other | Edelweiss MSCI India Domestic & World Healthcare 45 Index Fund(G)-Direct Plan | 0.440 |
| Flexi Cap Fund | Navi Flexi Cap Fund(G)-Direct Plan | 0.430 |
| ETFs – Other | Mirae Asset Hang Seng TECH ETF | 0.420 |
| Index | ICICI Pru Nifty Low Vol 30 ETF | 0.420 |
| ETFs – Other | ICICI Pru Alpha Low Vol 30 ETF | 0.410 |
| Index | Kotak Nifty Alpha 50 ETF | 0.400 |
| Index – Nifty | DSP Equal Nifty 50 Fund(G)-Direct Plan | 0.400 |
| Index Funds – Other | HDFC NIFTY50 Equal Weight Index Fund(G)-Direct Plan | 0.400 |
| Mid Cap Fund | PGIM India Midcap Opp Fund(G)-Direct Plan | 0.400 |
| Flexi Cap Fund | PGIM India Flexi Cap Fund(G)-Direct Plan | 0.390 |
| Index Funds – Other | Motilal Oswal Nifty 500 Fund(G)-Direct Plan | 0.390 |
| Index Funds – Other | UTI Nifty200 Momentum 30 Index Fund(G)-Direct Plan | 0.390 |
| Multi Cap Fund | HDFC Multi Cap Fund(G)-Direct Plan | 0.390 |
| Index Funds – Other | Motilal Oswal Nifty Bank Index Fund(G)-Direct Plan | 0.380 |
| Large Cap Fund | Canara Rob Bluechip Equity Fund(G)-Direct Plan | 0.380 |
| Flexi Cap Fund | Nippon India Flexi Cap Fund(G)-Direct Plan | 0.370 |
| Index – Sensex | LIC MF Index Fund-Sensex Plan(G)-Direct Plan | 0.370 |
| Index | Nippon India ETF NV20 | 0.360 |
| Small cap Fund | Axis Small Cap Fund(G)-Direct Plan | 0.360 |
| ETFs – Other | Nippon India ETF Consumption | 0.350 |
| Index | IDFC Sensex ETF | 0.350 |
| Index – Nifty Next 50 | L&T Nifty Next 50 Index Fund(G)-Direct Plan | 0.350 |
| Small cap Fund | Tata Small Cap Fund(G)-Direct Plan | 0.350 |
| Index Funds – Other | Edelweiss Large & Midcap Index Fund(G)-Direct Plan | 0.340 |
| Large & Mid Cap | Navi Large & Midcap Fund(G)-Direct Plan | 0.340 |
| Index | Axis Consumption ETF | 0.330 |
| Index – Nifty Next 50 | UTI Nifty Next 50 Index Fund(G)-Direct Plan | 0.330 |
| Index – Nifty Next 50 | IDBI Nifty Junior Index Fund(G)-Direct Plan | 0.320 |
| Index – Nifty Next 50 | Kotak Nifty Next 50 Index Fund(G)-Direct Plan | 0.320 |
| Index – Nifty Next 50 | Motilal Oswal Nifty Next 50 Index Fund(G)-Direct Plan | 0.320 |
| Large Cap Fund | ITI Large Cap Fund(G)-Direct Plan | 0.320 |
| Mid Cap Fund | ITI Mid Cap Fund(G)-Direct Plan | 0.320 |
| Small cap Fund | ITI Small Cap Fund(G)-Direct Plan | 0.320 |
| Index Funds – Other | Motilal Oswal Nifty Smallcap 250 Index Fund(G)-Direct Plan | 0.310 |
| Index | DSP Nifty 50 Equal Weight ETF | 0.300 |
| Index – Nifty | Franklin India Index Fund-NSE Nifty(G)-Direct Plan | 0.300 |
| Index – Nifty Next 50 | DSP NIFTY Next 50 Index Fund(G)-Direct Plan | 0.300 |
| Index – Nifty Next 50 | HDFC NIFTY Next 50 Index Fund(G)-Direct Plan | 0.300 |
| Index – Nifty Next 50 | ICICI Pru Nifty Next 50 Index Fund(G)-Direct Plan | 0.300 |
| Index Funds – Other | ICICI Pru Smallcap Index Fund(G)-Direct Plan | 0.300 |
| Index Funds – Other | Nippon India Nifty Smallcap 250 Index Fund(G)-Direct Plan | 0.300 |
| Large Cap Fund | Navi Large Cap Equity Fund(G)-Direct Plan | 0.300 |
| Multi Cap Fund | Axis Multicap Fund(G)-Direct Plan | 0.300 |
| Index | DSP Nifty Midcap 150 Quality 50 ETF | 0.290 |
| Index | ICICI Pru S&P BSE 500 ETF | 0.290 |
| Index – Nifty | Aditya Birla SL Nifty Smallcap 50 Index Fund(G)-Direct Plan | 0.290 |
| Index – Sensex | Tata Index Fund-Sensex Plan(G)-Direct Plan | 0.290 |
| Index Funds – Other | Aditya Birla SL Nifty Midcap 150 Index Fund(G)-Direct Plan | 0.290 |
| Index | Kotak Sensex ETF | 0.280 |
| Index | LIC MF ETF-Nifty 100 | 0.280 |
| Small cap Fund | UTI Small Cap Fund(G)-Direct Plan | 0.280 |
| Index – Nifty | IDBI Nifty Index Fund(G)-Direct Plan | 0.270 |
| Index Funds – Other | Edelweiss Nifty 100 Quality 30 Index Fund(G)-Direct Plan | 0.270 |
| Index – Nifty | L&T Nifty 50 Index Fund(G)-Direct Plan | 0.250 |
| Index | Nippon India ETF Nifty Midcap 150 | 0.230 |
| Index | Nippon India ETF Sensex Next 50 | 0.230 |
| ETFs – Other | Axis Technology ETF | 0.220 |
| Index | Axis Healthcare ETF | 0.220 |
| Index | Kotak IT ETF | 0.220 |
| Index | Nippon India ETF Nifty IT | 0.220 |
| Index – Nifty | DSP NIFTY 50 Index Fund(G)-Direct Plan | 0.220 |
| Multi Cap Fund | Kotak Multicap Fund(G)-Direct Plan | 0.220 |
| Small cap Fund | PGIM India Small Cap Fund(G)-Direct Plan | 0.220 |
| Index | Nippon India Nifty Pharma ETF | 0.210 |
| Index – Nifty | LIC MF Index Fund-Nifty Plan(G)-Direct Plan | 0.210 |
| Index Funds – Other | Motilal Oswal Nifty Midcap 150 Index Fund(G)-Direct Plan | 0.210 |
| ETFs – Other | ICICI Pru Consumption ETF | 0.200 |
| Index | ICICI Pru FMCG ETF | 0.200 |
| Index | ICICI Pru IT ETF | 0.200 |
| Index | Motilal Oswal Midcap 100 ETF | 0.200 |
| Index | SBI-ETF Nifty Bank | 0.200 |
| Index | SBI-ETF Nifty Next 50 | 0.200 |
| Index – Nifty | Aditya Birla SL Nifty 50 Index Fund(G)-Direct Plan | 0.200 |
| Index – Nifty | HDFC Index Fund-NIFTY 50 Plan(G)-Direct Plan | 0.200 |
| Index – Nifty | Nippon India Index Fund – Nifty Plan(G)-Direct Plan | 0.200 |
| Index – Nifty | UTI Nifty Index Fund -Direct Plan | 0.200 |
| Index – Sensex | HDFC Index Fund-Sensex(G)-Direct Plan | 0.200 |
| Index Funds – Other | ICICI Pru Midcap 150 Index Fund(G)-Direct Plan | 0.200 |
| Index Funds – Other | Nippon India Nifty 50 Value 20 Index Fund(G)-Direct Plan | 0.200 |
| Index Funds – Other | Nippon India Nifty Midcap 150 Index Fund(G)-Direct Plan | 0.200 |
| Large Cap Fund | Sundaram Large Cap Fund(G)-Direct Plan | 0.200 |
| Multi Cap Fund | Aditya Birla SL Multi-Cap Fund(G)-Direct Plan | 0.200 |
| ETFs – Other | Nippon India ETF Dividend Opportunities | 0.190 |
| ETFs – Other | Nippon India ETF Bank BeES | 0.180 |
| Index | Kotak Banking ETF | 0.180 |
| Index – Nifty | Kotak Nifty 50 Index Fund(G)-Direct Plan | 0.180 |
| ETFs – Other | Nippon India ETF Junior BeES | 0.170 |
| Index – Nifty | ICICI Pru Nifty Index Fund(G)-Direct Plan | 0.170 |
| Index – Nifty | IDFC Nifty Fund(G)-Direct Plan | 0.170 |
| Index – Nifty | SBI Nifty Index Fund(G)-Direct Plan | 0.170 |
| Debt | LIC MF G-Sec LT ETF-(G) | 0.160 |
| Index | Aditya Birla SL Banking ETF | 0.160 |
| Index | Axis Banking ETF | 0.160 |
| Index | HDFC Banking ETF | 0.160 |
| Index – Nifty | Tata Index Fund-Nifty Plan(G)-Direct Plan | 0.160 |
| Index – Sensex | ICICI Pru Sensex Index Fund(G)-Direct Plan | 0.160 |
| Debt | Nippon India ETF Nifty CPSE Bond Plus SDL – 2024 Maturity | 0.150 |
| Debt | Nippon India ETF Nifty SDL – 2026 Maturity | 0.150 |
| ETFs – Other | ICICI Pru Bank ETF | 0.150 |
| ETFs – Other | ICICI Pru Midcap Select ETF | 0.150 |
| ETFs – Other | ICICI Pru Pvt Banks ETF | 0.150 |
| Flexi Cap Fund | Mahindra Manulife Flexi Cap Yojana(G)-Direct Plan | 0.150 |
| Index | ICICI Pru Healthcare ETF | 0.150 |
| Index | ICICI Pru Midcap 150 ETF | 0.150 |
| Index – Nifty | Edelweiss Nifty 50 Index Fund(G)-Direct Plan | 0.150 |
| Index – Sensex | Nippon India Index Fund – Sensex Plan(G)-Direct Plan | 0.150 |
| Index Funds – Other | Axis Nifty 100 Index Fund(G)-Direct Plan | 0.150 |
| Debt | Motilal Oswal 5 Year G-Sec ETF | 0.140 |
| Index | Kotak NV 20 ETF | 0.140 |
| Index | Mirae Asset Nifty Next 50 ETF | 0.140 |
| Index | SBI-ETF BSE 100 | 0.140 |
| Index | Tata Nifty Pvt Bank ETF | 0.140 |
| Debt | Axis AAA Bond Plus SDL ETF – 2026 Maturity | 0.130 |
| Index | Mirae Asset Nifty Financial Services ETF | 0.130 |
| Index | Edelweiss ETF – Nifty Bank | 0.120 |
| Index | ICICI Pru NV20 ETF | 0.120 |
| Index | Indiabulls Nifty 50 ETF | 0.120 |
| Index | Kotak Nifty ETF | 0.120 |
| Flexi Cap Fund | ICICI Pru Flexicap Fund(G)-Direct Plan | 0.110 |
| Debt | Nippon India ETF Long Term Gilt | 0.100 |
| Index | ICICI Pru Nifty Next 50 ETF | 0.100 |
| Index | Invesco India Nifty ETF | 0.100 |
| Index | LIC MF ETF-Nifty 50 | 0.100 |
| Index | LIC MF ETF-Sensex | 0.100 |
| Index – Nifty | Axis Nifty 50 Index Fund(G)-Direct Plan | 0.100 |
| Index – Nifty | Motilal Oswal Nifty 50 Index Fund(G)-Direct Plan | 0.100 |
| Index | Quantum Nifty ETF | 0.094 |
| Debt | Nippon India ETF 5 Year Gilt | 0.090 |
| Index | Aditya Birla SL Sensex ETF | 0.080 |
| Index | IDFC Nifty ETF | 0.080 |
| Index | Mirae Asset Nifty 50 ETF | 0.080 |
| Index | Tata Nifty ETF | 0.080 |
| Index | Axis Nifty ETF | 0.070 |
| Index | DSP Nifty 50 ETF | 0.070 |
| Index | SBI-ETF Nifty 50 | 0.070 |
| Index | SBI-ETF Sensex | 0.070 |
| Index | Nippon India ETF Sensex | 0.060 |
| Index – Nifty | Navi Nifty 50 Index Fund(G)-Direct Plan | 0.060 |
| ETFs – Other | Bharat 22 ETF | 0.050 |
| ETFs – Other | Motilal Oswal M50 ETF | 0.050 |
| Index | Aditya Birla SL Nifty ETF | 0.050 |
| Index | Aditya Birla SL Nifty Next 50 ETF | 0.050 |
| Index | HDFC Nifty 50 ETF | 0.050 |
| Index | HDFC Sensex ETF | 0.050 |
| Index | ICICI Pru Nifty ETF | 0.050 |
| Index | ICICI Pru Sensex ETF | 0.050 |
| Index | Nippon India ETF Nifty BeES | 0.050 |
| ETFs – Other | CPSE ETF | 0.010 |
| Debt | BHARAT Bond ETF – April 2023 | 0.001 |
| Debt | BHARAT Bond ETF – April 2025 | 0.001 |
| Debt | BHARAT Bond ETF – April 2030 | 0.001 |
| Debt | BHARAT Bond ETF – April 2031 | 0.001 |
| Debt | BHARAT Bond ETF – April 2032 | 0.001 |
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