Zerodha MF has launched large-cap, mid-cap ETFs: Should you invest in them?

Being a new fund house—it was launched in November 2023—Zerodha Fund House is, at present, building its basic set of schemes. It had started by launching a tax-saver index fund and a large and mid-cap fund back then. Earlier this year, the AMC launched its liquid ETF and gold ETF. Now, Zerodha Fund House has launched yet another pair of basic funds. ZN100 will invest in the 100 largest stocks by market capitalisation and ZM150 will invest in the next 150 largest companies (referred to as mid-cap companies) by market capitalisation.

What works?

While there are close to 91 passively-managed schemes already in the large-cap space, the mid-cap passive scheme is an emerging category with just 16 funds. Both these schemes—especially ZN100—are quite basic; there’s nothing new in them. However, what might be interesting to watch out for is the expense ratio that ZN100 and ZM150 charge in the months and years ahead.

The average expense ratio of large-cap oriented passive funds (index funds and ETFs) is 0.40 percent, with some ETFs going as low as 0.03 to 0.04 percent. However, bear in mind that a scheme’s low expense ratio needn’t always be a good thing from the regulatory point of view.

Since both ZN100 and ZM150 are ETFs, their expense ratios are expected to be on the lower side. A large-cap fund is a good addition in your portfolio, and given that active fund managers have found it challenging to outperform the benchmark indices in recent years (though their track record has improved of late), many experts recommend a passive fund for the large-cap exposure.

A passively managed mid-cap fund is a recent phenomenon. And passive funds have done well here. There are broadly three kinds of mid-cap passive funds at the moment: those that track the 50 top mid-cap stocks in the Nifty 150 mid-cap index, those that track 100 mid-cap indices, and those that track the Nifty 150 midcap index, which is the majority. For those who wish to add a little variety to their portfolio, ZM150 can be a good addition.

What doesn’t?

There is very little at the moment that really stands out for ZN100 and ZM150. Since both are basic schemes, neither is a pioneer in its segment. There are plenty of options available out there—with expense ratios and track records.

Since the two schemes are ETFs, you won’t be able to invest in them through Systematic Investment Plans (SIP).

Moneycontrol take

Launching simple products such as ZN100 and ZM150 to complete its basic suite is just one part of Zerodha Fund House’s master plan. Actually, the fund house is getting ready for part-2 of its growth strategy: solutions funds.

These funds—as and when Zerodha MF launches them—will offer interesting combinations of its existing, plain-vanilla ETFs and index funds. For instance, it has filed an offer document for an ETF that invests in a combination of equity and gold. This is pending approval before the Securities and Exchange Board of India (SEBI: the capital market regulator).

Other such solutions’ funds offering asset allocation products—for instance, a large-mid-small cap ETF—might also be launched, where it would invest in existing schemes. This could be, say, a combination of ZN100 and ZM150, and then perhaps a small-cap ETF.

Zerodha MF also aims to utilise its existing Gold ETF in such combinations in future. Asset allocation products are best launched on an ETF platform as it becomes easy for the master scheme to get in and out of the underlying schemes. This is also why Zerodha has launched ZN100 and ZM150 as ETFs.

Speaking over the phone from Bengaluru, Vishal Jain, the CEO of Zerodha Fund House, told Moneycontrol that solutions–oriented funds would give packages to investors who have hitherto stayed away from mutual funds because they find it too complex. The fund house might not be expecting a great collection in ZN100 and ZM150, but both are part of the bigger plan.

The NFOs close on June 7.