Index schemes of mutual funds are the cheapest among equity products but investors need to watch for costs within the category to decide where to invest.
Though returns within the index fund category are almost the same, the total expense ratio the annual fee that fund houses charge investors of various schemes are different, making it essential to focus on the cost.Index funds are passively managed and there is hardly any difference between one fund and another.
To maximise your returns, go with the lowest expense ratio fund, says Harshvardhan Roongta, CFP, Roongta Securities.Among direct plans of the Nifty Index Fund, UTI and ICICI charge 10 basis points, HDFC charges 15 basis points, IDFC and DSP charge 18 basis points, Reliance charges 29 basis points, SBI 23 basis points and Franklin 69 basis points.Financial planners said many investors are not aware that higher cost shrinks returns over a longer period.
Another thing which investors need to look at in an index fund is the tracking error.
Tracking error is the difference between a mutual fund portfolios returns and the benchmark index it was designed to copy.
However, with large sized funds, it is not a distinguishing factor, says Vijay Kuppa, founder Orowealth.Despite this, different index funds charge different expense ratios to investors.
Some of the popular index funds in India are on the Nifty 50, S-P Sensex and Nifty Next 50 indices.SchemeDirect plan expense ratio(%)Regular plan expense ratio (%)Sensex and Nifty FundsHDFC Index Fund- Sensex0.100.30ICICI Prudential Nifty Index 0.100.45ICICI Prudential Sensex index0.100.30UTI Nifty Index 0.100.17HDFC Index Fund-Nifty 50 0.150.30Nifty Next 50 Index FundsUTI Nifty Next 500.270.98DSP Nifty Next 500.290.59ICICI Prudential Nifty Next 500.390.85Source: Accord Fintech, Complied by ETIG DatabaseInvestors who have already invested in an index fund with a higher expense ratio could move them into ones with lower expense ratio, said financial planners.Investors could shift after they complete a year to get the benefit of a lower expense, adds Kuppa.Over the last couple of years, many investors have increased exposure to index funds as returns from several categories of actively-managed funds failed to beat the Nifty 50 returns.
In the past one year, the Nifty 50 has returned 12.51%.As per data from Value Research, the large-cap category has returned 9.82% while the Multicap category has returned 6.42%.
Many retail investors prefer index funds to ETFs, which require a demat account and can be bought on stock exchanges.