Zerodha forays into MF space with passive fund launches: Should you invest?

The two funds will be open-ended, passive and index equity mutual fund schemes. The two will be benchmarked against the Nifty LargeMidcap 250 Index TRI (total returns index).

Months after receiving the final approval from market regulator Sebi for its asset management company, Zerodha on Wednesday announced the launch of its maiden passive mutual funds — Zerodha Nifty LargeMidcap 250 Index Fund and Zerodha ELSS Tax Saver Nifty LargeMidcap 250 Index Fund. 

The two funds will be open-ended, passive and index equity mutual fund schemes. 

The Index Fund is an open-ended scheme replicating the Nifty LargeMidcap 250 Index. The ELSS is an open-ended passive equity-linked savings scheme with a statutory lock-in period of three years and tax benefit replicating Nifty LargeMidcap 250 Index. 

The NFO will be open from 20 October 2023 to 3 November 2023.

 The schemes will adopt a passive investment strategy and will endeavour to invest in stocks in proportion to the weightage of the stocks in the Nifty LargeMidcap 250 Index. The ELSS scheme provides tax benefits under Section 80 (C) of the Income-tax Act, 1961.

While the index fund will entail a minimum SIP investment of Rs 100, the minimum threshold for the ELSS fund has been set at Rs 500. 

Apart from Zerodha, the only other fund tracking the Nifty LargeMidcap250 Index is the Edelweiss Nifty LargeMidcap 250 Index Fund, which was launched in December 2021.

Zerodha Fund House will only have direct plans.

The fund launch comes at a time when the competition has heated up in the Indian asset management company space. Helios MF has also ventured into active space with the launch of its overnight fund and flexicap fund. Notably, this is the fund house’s first equity launch and the second NFO. Helios MF has debuted with Helios Overfund Fund on October 19. Earlier this month,  Mumbai-based Neo also bagged $35 million in funding to build products in the financial advisory and asset management space. In September, Groww also got the Sebi nod to launch its first index fund. Earlier this year, conglomerate Reliance Jio teamed up with BlackRock to enter the Indian asset management market. 

About the Index 

1. The Nifty LargeMidcap 250 Index aims to reflect the performance of the large and midcap companies listed at NSE with 50% weight allocated to each segment.
2. The 250 stocks of Nifty LargeMidcap 250 Index are the combination of the universe of stocks forming part of Nifty 100 Index and Nifty Midcap 150 Index.
3.  The Nifty LargeMidcap 250 Index covers approximately 84% of the full market capitalization, around 87% of the free-float market capitalization and approximately 69% of the total liquidity of all traded equity stocks on NSE based on 6 month average as of September 29, 2023
4. The largest sectors in Nifty LargeMidcap 250 Index are Financial Services (27.74%), Information Technology (9.06%) and Capital Goods (7.89%)
5. Since inception on April 01, 2005, till September 29, 2023, the Nifty LargeMidcap 250 Index has delivered 15.8% CAGR as compared to 14.5% CAGR by Nifty 100 Index and 17.3% CAGR by Nifty Midcap 150 Index
6. The Nifty LargeMidcap 250 index has not witnessed negative returns in the 7 year and 10 year investment horizons, based on daily rolling return analysis (Source: NSE Indices.  Data as on September 29, 2023).

It is important to note that midcap stocks, while offering growth potential, also come with higher risk. There’s no guarantee that this index will consistently generate stable returns that can offset volatility.

There is an equal allocation of large and midcap stocks in Nifty LargeMidcap 250. If there is a large cap-fuelled rally, this index will not do as well as a pure large-cap fund (or index). Similarly, if the rally is midcap-fuelled,  a pure midcap index or fund will do better than this.

Experts suggest that this index is apt for high-risk tolerant investors who want a blend of large-cap and midcap exposure.

" Midcap stocks have the potential to evolve into large-cap and blue-chip companies over the short to medium term. Investing in such funds allows you to tap into these opportunities. Over the past five years, this index has delivered an impressive 17% total return, with a 15.8% return since its inception. However, this index fund focuses on midcap stocks, which are inherently high-risk. The volatility in midcap stock prices can be reflected in this index..For instance, in the past week, the index experienced a 4% drop, highlighting this risk," said Suresh KP, Investment Adviser and NISM Certified - Research Analyst.