Index funds under focus as Navi MF looks to disrupt the market

NFO for Navi Nifty 50 Index Fund opens July 3; scheme will have expense ratio of just 0.06% under the direct plan and 0.26% under regular plan which is bought through an intermediary

Index funds are in the news after Sachin Bansal-backed Navi Mutual Funds (MF) launched a Nifty 50-benchmarked fund that has the lowest expense ratio in the industry. The new fund offer (NFO) for the Navi Nifty 50 Index Fund opens on July 3. The scheme will have an expense ratio of just 0.06 per cent under the direct plan and 0.26 per cent under the regular plan (which is bought through an intermediary).

Until now, the cheapest index funds under the direct plan were offered by ICICI Prudential and Motilal Oswal MF. They had an expense ratio of 0.10 per cent.

ICICI Prudential and UTI MF offered the cheapest index funds under the regular plan at 0.30 per cent.

The largest index fund in terms of assets under management (AUM) is UTI Mutual Fund’s scheme benchmarked to the Nifty 50 index.

An index fund is similar to an exchange traded fund (ETF) and tracks a basket of securities. An ETF can be bought and sold on the stock exchange platform, whereas an index fund needs to be bought and sold from a fund house at the end of the trading day. In an index fund, there is no divergence between net asset value and market price, a risk that exists in ETFs and investors can also run an SIP.  

Expense ratio is a critical element when it comes to selecting an index fund. Lower the expense ratio the better it is. However, experts say there are other key parameters investors should look at.

These include AUM. Experts say very small-sized funds should be avoided. Also, look at tracking error. This is a measure of how closely the fund tracks its benchmark. Lower the tracking error, the better.