India’s cheapest fund Navi Nifty 50 Index fund NFO opens on July 3; should you subscribe?

Flipkart co-founder Sachin Bansal owned Navi Mutual Fund announced the launch of Navi Nifty 50 Index Fund, an open-ended equity scheme that would replicate the Nifty 50 index. The NFO will open on 3rd July 2021 and closes on 12th July 2021. The most unique feature of the Navi Nifty 50 Index Fund is the “lowest cost” compared to any other index scheme in the passive funds category. The 0.06% expense ratio proposed to be charged by the fund for its direct plan offering, is the lowest in the index schemes category so far. For index funds, the category average expense ratio is 0.25% and many existing index funds are charging expense in the range of 0.15-0.20%.

Commenting on the new fund, Saurabh Jain, MD and CEO, Navi AMC Limited said, “All funds have professional portfolio managers. With an index fund, investors don’t need to pay more for getting the expertise to hand-pick stocks. The real benefit to the investor is brought by lowering the expense ratio while still providing the same quality professional portfolio management through index funds. Working with our partners and leveraging our technology background, Navi has lowered the cost to 0.06% for the direct plan offering, which is the lowest in the index schemes category, as of today. Our goal is to be able to keep providing investment opportunities to investors at the best possible cost.”

While the low expenses ratio may sound music to your years let’s first understand all aspects of an index fund.

What are index funds?

These funds basically invest in stocks that imitate a stock market index like the NSE Nifty, BSE Sensex, etc. These are passively managed funds which means that the fund manager invests in the same securities as present in the underlying index in the same proportion and doesn’t change the portfolio composition. These funds endeavour to offer returns comparable to the index that they track.

In the case of Navi Nifty 50 Index Fund will invest in securities covered by the Nifty 50 index and access to the growth of market leaders thereby mirroring the performance of benchmark index Nifty 50.

Who should invest in an index fund?

Since Index Funds track a market index, the returns are approximately similar to those offered by the index. Hence, investors who prefer predictable returns and want to invest in the equity markets without taking a lot of risks prefer these funds.

Navi said its new scheme would be suitable for investors who are seeking long-term capital appreciation, investment in securities covered by the Nifty 50 index and access to the growth of market leaders.

Risk & Return

Since index funds track a market index and are passively managed, they are less volatile than actively managed equity funds. Hence, the risks are lower. During a market rally, index funds returns are good usually. However, it is usually recommended to switch your investments to actively managed equity funds during a market slump.

Since the index funds endeavour to replicate the performance of the index, returns are similar to those of the index. However, one component that needs your attention is tracking error. Tracking error is the difference between the returns of the passive fund and that of the benchmark, at the end of the chosen investment period. A small tracking error indicates that the fund tends to follow the benchmark very closely. Therefore, before investing in an index fund, you must look for one with the lowest tracking error.

Navi Nifty 50 Index Fund is an NFO there is no history of tracking error. The Nifty has delivered a five-year CAGR of 15.7% and a 10-year CAGR of 12.5% (as of 25 June) the fund will be mirroring returns generated by Nifty 50.

Tax implications

When you redeem the units of an index fund, the earnings are taxable capital. The rate at which you will be taxed depends on the period for which you stayed invested in the scheme – the holding period. The tax rates are as follows:

Short Term Capital Gain (STCG) – A holding period of up to one year. STCG is taxed at 15%.

Long Term Capital Gain (LTCG) – A holding period of more than one year. There is no tax on LTCG of up to Rs. 1 lakh. Above this amount, LTCG is taxed at the rate of 10% without the benefit of indexation.

Even the dividends distributed by the fund house are taxed, a Dividend Distribution Tax of 10% is deducted at the source before making the payment.

Should you invest?

Since it’s an index fund tracking Nifty 50 investors can go ahead and subscribe to the NFO as the risks are minimum, however, investors should be watchful of tracking error.

“One of the benefits is investing in an index fund is lower cost and since Navi is giving even lower cost than the competition, it is good for the investors. Don’t really see any risk as far as an investor is comfortable mimicking Nifty 50 returns. Obviously, one of the factors that one has to be careful about in the index fund is a tracking error. As that’s the only parameter that tells you how efficiently the index fund is being managed. But even in there, there is usually not much of a difference,” explained Hemant Rustagi, CEO, Wiseinvest Advisors.

Navi Mutual Fund

Navi Mutual Fund is a part of Sachin Bansal’s BFSI group Navi. Bansal acquired Essel Mutual Fund from the Subhash Chandra-owned Essel Group earlier in February and renamed it. The group also includes a multi-state microfinance non-banking financial company, which has applied for a universal banking licence.

(Disclaimer: Before investing, please consult your financial adviser.)