zero expense mutual fund

Can zero expense mutual fund schemes work in India?

Fidelity Investments has just launched a couple of new mutual fund schemes with zero expenses for retail investors in the US. These are the first ever zero expense ratio self-indexed funds for retail investors available in the market -Fidelity zero total market index fund (FZROX) and Fidelity zero international index fund (FZILX).

In India, SEBI has been making efforts to make mutual fund investment a viable proposition trying to bring down the expense ratio and to increase the take-home returns of investors. With regards Index funds, coming up with zero expense mutual fund schemes can be a practical thing. But applying the same in case of actively managed funds would be challenging and might even be unsustainable in the long run.

The revenue model for zero expense mutual funds is to earn stock lending fees (SLB) on the underlying holdings. The problem is, the stock loan market is practically non-existent in India, and so zero-fee mutual funds are a non-starter. That said there are already several index ETFs in India that have an expense ratio in the range of 5-10 bps which can be considered as an alternative to zero-fee mutual fund schemes to invest in Indian market.

The primary question is should you invest in a zero expense mutual funds if available in India. Investment decisions should be based on a number of factors, the most important being the investment goal, the investment duration, the risk appetite, and the historical performance of the fund. While the expense ratio is a criteria, it should not be the over-riding factor for an investment decision. The right way to invest in a mutual fund is first to pick the right fund, and then select the lower-fee direct investment option not the other way around

Indian Mutual Funds have traditionally produced a significant amount of alpha over the benchmark. Thus, active investing is more prevalent in India as compared to markets like the US where passive investing is garnering a lion’s share of flows. Thus from an Indian context currently as things stand evaluating funds from a risk adjusted basis is a more useful barometer.

Lastly, zero expense mutual fund schemes like those launched by the Fidelity follow their own in-house indices whereas Indian index funds and ETFs follow broader market indices. This makes existing Indian ETFs and index funds more transparent than Fidelity’s exchange funds. Also, the expense ratios of many Indian ETFs and direct plans of index funds are already as low as 0.05%, making them as good as zero cost funds.

Security lending & borrowing: Earn extra income

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 10 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

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