The Sachin Bansal-backed Navi Mutual Fund (Navi MF) has been launching several low-cost passively-managed funds, mostly index funds. Last month, it launched the Nifty Bank Index Fund, which charges investors a total expense ratio (TER) of 0.12 percent for its direct plan.
Earlier, Navi MF had launched the cheapest Nifty Index Fund and the cheapest Nifty Next 50 Fund.
Now, the fund house has launched a Nifty Midcap 150 Index Fund, which is also the cheapest midcap index fund in its category.
Here are a few things you should know about Navi MF’s latest fund:
How the midcap index has performed
As the name suggests, the fund will be tracking the Nifty Midcap 150 Index. The index has slipped 7 percent since January 1. Over the last six months it has risen just 3 percent, as fears of rising interest rates have put pressure on mid- and small-cap stocks.
As of January 31, the index had given about 17 percent weight to the financial services sector, and a little over 10 percent to the consumer goods space. For other sectors, including pharma, IT, chemicals and automobiles, the index has weights in the range of 6-9 percent.
Who the fund is suitable for
As the job of a passive fund is to mimic the returns of the underlying index, any wide tracking errors can lead to it underperforming its peers. Investors need to watch out for this.
A mid-cap index fund can be considered by an investor who doesn’t want to take any fund manager risk and is willing to take the returns generated by the index benchmark.
The Nifty Midcap 150 comprises stocks that follow the top-100 stocks in terms of market cap. So, in terms of market cap, these are the stocks from the 101st to the 250th rank.
Within the mid- and small-cap categories, it has not been easy for active fund managers to outperform benchmark returns. To be sure, some funds have managed to do this, but there are also quite a few that have underperformed benchmark returns.
Disadvantages of a passive fund
Passive funds like the one being launched by Navi MF track an index, which is market cap-based. So, stocks that are performing well keep seeing their weights move up and stocks that are declining see their weights reduce.
However, there can be periods when these trends change and sectors that are outperforming start to underperform.
An index fund will not be able to protect investors when sectoral preferences change and this could lead to volatility in the fund’s returns, till the weights re-adjust.
On the other hand, if a fund manager in actively-managed schemes has got her act right, she can book profits and move out of the sector before the trends change.
The long track record of other funds
While Navi MF’s Nifty Midcap 150 Index Fund is the cheapest in its category with a TER of 0.12 percent, there are fund houses with long track-records running midcap index funds.
With index funds, it is not just the TER of the fund that can impact investor returns; how efficiently the index fund is managed will also have a bearing on returns.
This will also determine whether the fund has any wide tracking errors compared to the index.
Bear in mind that managing an index comes with its own set of challenges that the mutual funds need to tackle.
For example, an index fund may find it challenging to immediately deploy investor flows in the proportion that mimics the index's stock weights.
Also, the fund may be holding on to cash to meet redemption requests and this cash can have a drag on fund returns.
The exclusion and inclusion of stocks in an index is based on the day's closing price. The fund may not always manage to get the stocks included or excluded at the same price.
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