Index fund investing may not get cheaper as MFs likely to avoid price war

Navi MF's move to launch Nifty 50-based index fund at 0.06% had stoked fears of price war

The cost of investing in index funds is unlikely to decline further even as the latest entrant to mutual fund space Navi, set up by Flipkart co-founder Sachin Bansal, has unleashed a price war by announcing ultra-low expense ratio. Industry players said existing players may not cut their TER drastically as such low costs are unviable for their business.

Navi MF had announced the launch of Navi Nifty 50 Index Fund with an expense ratio of 0.06 per cent for its direct plan offering, the lowest for any index schemes in the market.

The expense ratio for existing schemes range between 0.10 per cent and 0.30 per cent for index funds.

“While it will be difficult to compete with this pricing, such a low-cost model is unsustainable for the long term. Even if some fund houses try to reduce the expense ratio—it will be just to attract assets,” said a senior passive head of the leading fund house.

On the contrary, few index schemes offered by Tata MF, UTI MF and HDFC MF had increased their total expense ratio for their direct plans. HDFC Index Fund- Nifty 50 Plan had a TER of 0.10 per cent which was increased to 0.20 per cent in its direct plan. Tata Index Fund-Nifty had a TER of 0.05 per cent which was hiked to 0.19 per cent as on May end.

Market players said that index funds need to charge at least 0.10-0.15 percent to cover their costs. MFs are permitted to charge certain operating expenses for managing a mutual fund scheme – such as sales and marketing, administrative expenses, transaction costs, investment management fees, registrar fees, custodian fees, audit fees – as a percentage of the fund’s daily net assets.

All such costs for running and managing a mutual fund scheme are collectively referred to as Total Expense Ratio (TER). Market regulator Sebi allows fund houses to charge a TER of up to 1 per cent for index funds.

Anil Ghelani, head of passive investments at DSP Mutual Fund says, in the past we have seen some of the index funds charging around 0.05 per cent. But after a few months they again increased the expense ratio.

“It is not that investors will clamor to start investing in a fund only because costs are lower. Investments into MF is not a transactional decision making, this is a structural decision making which leads to a long-term association,” added Ghelani.

The aim for passive investing is to mirror the index returns and not to beat it. An index fund is a mutual fund scheme that endeavors to replicate the constituents of its target benchmark index.

Chintan Haria, head-product development and strategy, ICICI Prudential AMC says, “In India, passive landscape is already price competitive. But as the economics of scale is achieved with increasing asset size, there will be further rationalisation of prices across the passive space.”