Here's a snapshot of what is going on with Nifty index funds in India. The annualised tracking error is computed using the one year of data ending 31 July 2008.
| Scheme | Tracking error (%) | Expenses (%) |
|---|---|---|
| Nifty BeES | 0.19 | 0.50 |
| Franklin India Index Fund - NSE Nifty Plan - Growth | 0.42 | 1.00 |
| Franklin India Index Tax Fund | 0.58 | 1.50 |
| UTI SUNDER | 0.59 | 0.50 |
| Tata Index Fund - Nifty Plan - Option A | 0.63 | 1.50 |
| UTI Nifty Fund - Growth | 0.70 | 1.21 |
| PRINCIPAL Index Fund - Growth | 0.86 | 0.75 |
| ICICI Prudential Index Fund | 1.10 | 1.25 |
| SBI Magnum Index Fund - Growth | 1.26 | 1.50 |
| Canara Robeco Nifty Index - Growth | 1.45 | ? |
| Birla Sun Life Index Fund - Growth | 1.76 | 1.51 |
| LIC MF Index Fund - Nifty Plan - Growth | 1.99 | 1.50 |
| HDFC Index Fund - Nifty Plan | 2.55 | 1.50 |
First, the expense ratio for an index fund is wayyyyyy tooo high. 1.50%, give me break. Second, the higher the expense ratio, the higher the tracking error. Who in their right mind would buy these expensive funds.
ReplyDeleteSo should one rather buy Nifty BEES, the ETF. Is that economical?
ReplyDeleteAjay,
ReplyDeletePlease clarify a point. How have you defined Tracking Error (TE). Actual definition of TE is standard deviation of Alpha (+ or -). So there could be very high positive Alpha along with very high TE implying that thought the performance is superior to bench mark but degree of superiority has varied over time. The same way, there could be negative Alpha but low TE if underperformance is consistent in time.
From your blog, I get an impression that you have taken TE merely as degree of underperformance. Please clarify. As investor, I would be comfortable with high TE if Alpha has remained positive even if it has varied over time.
Aftab Alam
On index fund tracking error and related issues, see these two papers: link 1 and link 2.
ReplyDeleteI second Mr. Vyas's comment: expense ratios for ETFs in India is way too high by international standards. The 0.5% expense ratio on Nifty BeES (actually, 0.8% is the max chargeable, although they've been running at 0.5% for a while) compares very poorly with, say, the 0.15% or less on most Vanguard funds. And Nifty BeES are the best we have at the moment.
ReplyDeleteI wonder if this is merely a result of the utter lack of competition in this space or if perhaps there are deeper structural reasons for this...
Can you explain me what does Nifty20 mean? I heard we can buy it for delivery and there is no lot size. If it exists, I think Nifty20 should be a good delivery buy at this level.
ReplyDelete--
Thank you
Ajay,
ReplyDeletewhy are the fees so high? In the U.S. index funds charge about 10-15bps, however the biggest source of revenue for these funds is the securities lending fee from the securities lending program(slp),could this be the reason for the fee differential between index funds in India and U.S.
Equity ETF's in India have lower expense ratios of ~0.5% p.a., although not as low as their US ETF or Index fund counterparts, its still better than their Indian index fund counterparts. Plus you have the added benefit that all of the corpus is invested instead of maintaining a liquidity reserve for managing redemption's and there are no entry and exit loads for most equity ETF's I have seen (2 precisely). So if you want to invest in an Index Fund I think you'd be better off to go to an ETF.
ReplyDeleteI think the tracking error for ETF's should be lower as compared to Index funds because they do not have to maintain any cash to meet redemption's.
ReplyDeleteI have a fundamental question on the Nifty BeES. Has anyone been able to get a price equal to 1/10th of the Nifty Index. I have tried with two brokers and in both places, the price that is presented is about 3 to 4% above the price at which they ought to be available.
ReplyDelete@Seshadri,
ReplyDeleteBrokers don't determine the price of NiftyBeES, the market does:
http://nseindia.com/marketinfo/equities/cmquote_tab.jsp?key=NIFTYBEESEQN&symbol=NIFTYBEES&flag=0
The 2-3% premium is because the instrument accumulates dividend over time. You can check the real-time NAV (which includes the dividend) here:
http://www.benchmarkfunds.com/index.cgi
I think you'll find that on most days, you can pick it up for less than the NAV.
Is the expense ratio of the UTI Nifty Index Fund 1.21% (as noted above) or 0.75 (as noted in http://www.utimf.com/Bulletin/MARCH2009/masterindexfund.pdf).
ReplyDeleteI would appreciate it if anyone could let me know as I hold shares in the fund. Thanks in advance.
Hi Ajay, have u done similar analysis in recent times i.e., 2017-2018. The above figures seems obsolete in 2018 - for eg: expense ratio for UTI Nifty Growth Fund - direct is 0.13% and the asset allocation of this fund seems to closer to nifty 50 as compared to Nifty BeES.
ReplyDeleteIs there any Fresh Niftee Bees withdividend pay out option
Delete