Investors have got one more reason to invest in stocks through mutual funds. In addition to better risk management, high returns and professional money management now it is the low cost of investments that should work for the small investors when they take mutual fund route to invest their money in stocks.
Mutual fund companies are charging as low as five basis points to manage money in exchange traded funds tracking popular indices such as Nifty and Sensex.
“Low fund management charges definitely add to the investor’s return. One should have at least 20% of his equity allocation in the index funds,” says Harshavardhan Roongta, principal financial planner with Mumbai based Roongta Securities.
For the uninitiated, many mutual fund houses offer exchange traded funds tracking stock indices such as Nifty or Sensex. Some fund houses also offer schemes that track thematic indices such as consumption, banking, public sector banks, infrastructure.
The units of these schemes are listed on the stock exchanges and one can buy them in her demat account through her stock broker.
“Most of the money invested in ETF is of institutions. Not much money comes from individual investors in these products as they opt for actively managed funds given the possibility of earning higher returns,” says D P Singh, chief marketing officer, SBI Mutual Fund.
As EPFO has decided to invest 10% in stocks through ETF route, the fund houses have decided to cut their fees to attract money. Today we have index ETF charging as low as five basis points. 100 basis points equals to one percentage point. Please refer table for numbers. As the charges are uniform for all investors in the scheme, the small investors stand to benefit from this low cost. However, there are two more things they should keep a track of while choosing an index ETF – transaction costs and tracking error.
Data sourced from respective fact sheets
SBI MF numbers as on December 30, 2016.
ICICI MF numbers as on February 28, 2017.
“Do not ignore tracking error. Both the tracking error and the expense ratio should be as low as possible,” explains Harshavardhan Roongta.This ensures that the index ETF delivers returns in line with the underlying index. As these schemes mimic the underlying index by owning all the stocks that comprise the index in the same proportion that they are in the index, the scheme stands a chance to offer index return- popularly termed as market returns. This also does away the risk that the fund manager may underperform the broad market.
Though one may get an attractive money management fee to latch on, do not ignore the other costs. First, you need to have a demat and broking account which will cost you around Rs 500 a year.
Second, it will also cost you around 0.25% to 0.5% brokerage of the transacted value to buy or sell. If you have a broking account with a discount broker then you may have to pay a flat brokerage of around Rs 20 per order when you buy or sell.
In case you have a broking account with Zerodha, you get to buy it without paying any fee as it will be a delivery trade. But while selling you will be charged a flat charge. Please note you have to also pay demat charges each time you sell.
In addition to this, there are some hidden expenses that come in the form of the efforts you have to take. In case of a traditional MF’s regular plan, you may sign up for a systematic investment plan (SIP) which helps you buy units of the scheme each month by investing a fixed sum. In case of index ETF however either you will have to keep placing order each month or have to sign for StockSIP facility, if your broker offers it. In case of StockSIP facility you have to specify how much units you want to buy each month.
The broker will automatically place orders for you on the stipulated date of the month for the stipulated number of units and you will pay accordingly. Here the amount invested keeps varying and you will have to be prepared for it.
If you are not sure which equity fund will make money for you or worried about the fund manager going wrong, consider investing in index ETF.
Experts admit that most investors chase the best performing mutual fund schemes because there is a scope for outperformance in Indian stocks.
However, as markets mature with rising institutional participation the opportunities to outperform will shrink and index funds will emerge as the best means to invest in Indian stocks.As more and more money make it to markets through index ETFs there is a high possibility that the costs will sustain at low levels and Indian investors benefit from it.