Coming up with zero expense mutual funds can be thought of as practical thing in index funds. But applying the same in case of actively managed funds would be challenging and might even be unsustainable in the long run.

Recently, Fidelity Investments launched new mutual fund schemes with zero expenses for retail investors in the US. These schemes are known as Fidelity Zero Index Funds. According to a company press release, these are the first-ever zero expense ratio self-indexed funds for retail investors available in the market.

At Moneycontrol, we spoke to some of the experts in mutual fund industry to know whether Indian AMCs are equipped to launch such zero expense mutual fund schemes or spin-off something similar in near term for retail investors. Let’s look at their opinions on this subject.

Expert Take: Zero-fee mutual funds are a non-starter and unsustainable in the long run

In India, SEBI has been making efforts to make mutual fund investment a viable proposition in India. Archit Gupta, Founder & CEO ClearTax said, “The fund houses are working hard to bring down the expense ratio and to increase the take-home returns of investors. As regards Index funds, coming up with zero expense mutual funds can be thought of as practical thing. But applying the same in case of actively managed funds would be challenging and might even be unsustainable in the long run.”

Kunal Bajaj, Founder & CEO, Clearfunds said, “The revenue model for zero expense mutual funds is to earn stock lending fees on the underlying holdings. The stock loan market is practically non-existent in India, so zero-fee mutual funds are a non-starter.”

Kaustubh Belapurkar, Director Manager Research, Morningstar added, “We don’t think we will be seeing zero expense mutual funds from an Indian context anytime soon. This funds would typically be launched for passive strategies like index funds or ETFs. That said there are already several index ETFs 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.”

In case Indian AMCs do offer zero expense funds. Should investors invest?

Anyhow, even if the fund houses come up with such a proposition, investors should not take impulsive decisions to invest in zero-expense funds. Navin Chandani, Chief Business Development Officer, said, “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 under no circumstance be the over-riding factor for an investment decision.”

Expenses are an important consideration, but firstly you need to consider the return net of expenses that a fund can generate. Belapurkar said, “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.”

For parameters, an investor should evaluate while investing in mutual funds Bajaj recommended: “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.”

For Indian investors preferring to invest in passively managed funds, Manish Kothari – Director & Head of Mutual Funds, recommended Indian index funds and ETFs over zero expense funds for two reasons.

First, zero cost funds 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. Second, 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.

Also, a newly-launched fund would lack a track record and you would have to rely on the past performance of the fund manager. Gupta explained, “If the newly launched ‘zero expense ratio fund’ is offering you a unique benefits which are not available in existing funds, then you may think of giving it a shot. Otherwise, you would be better off in sticking to the existing fund which has a known track record and good performance history.”


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