Indian investors get access to Vanguard

International investing is the new smash hit in the mutual fund ecosystem. A category that had 35 schemes till 2019 is now flourishing with 64 funds, a rise of a whopping 83% in just two years! Well, a lot of this can be attributed to blockbuster post-COVID returns in global markets, particularly the US which has enthused Indian investors the most. Then, of course, there are rupee depreciation and geographical diversification benefits as well.

Joining this hot space now, Navi Mutual Fund has rolled out a new fund offer (NFO) on February 04, 2022, the Navi US Total Stock Market FoF. The subscription period for the fund will close on February 18, 2022. What makes this fund even hotter is the fact that currently, it is the only gateway for Indians to invest in Vanguard, the pioneer of offering low-cost passive fund management schemes. It's certainly like an Aha! moment for passive junkies.

This NFO comes at a time when the mutual fund industry is on the brink of exhausting permissible foreign exposure as per SEBI rules and has therefore put gates on fresh investments in many of the international mutual funds. However, there is no impact on the schemes that invest in foreign ETFs (as also in the case of this NFO launched by Navi) because they have a separate limit, and there is enough runway there for now. You can read more about it here.

About the strategy
The Navi US Total Stock Market FoF is a fund of funds that aims to invest in the Vanguard Total Stock Market ETF (VTI). VTI is the third-largest ETF in the world and tracks the performance of the CRSP US Total Market Index. The latter has more than 4,000 constituents, across small-, mid- and large-cap companies, representing nearly 100 per cent of the US investable equity market.

The top 10 holdings include behemoths such as Apple, Microsoft, Google, Amazon, Tesla and the like and make up around 25 per cent of the portfolio. With 29 per cent weight, technology is the top sector in the index which VTI tracks, followed by consumer discretionary and industrials with 16 per cent and 13 per cent proportion in assets respectively (as on December 2021).

The expense ratio of this scheme as proposed by the AMC is 0.06 per cent. This is on top of the expenses of the underlying ETF which is 0.03 per cent. Hence with the combined expense ratio of 0.09 per cent, this scheme would be the cheapest fund in the international category as of now.

Though the investment objective of the fund says it can invest in VTI or Schwab Total Stock Market Index Fund (SWTSX) but as per our conversation with the fund house, the latter has only been added as a backup fund on SEBI's advice and VTI is the primary fund in which the scheme would be investing.

About the performance
As mentioned above, the underlying ETF of this new fund tracks CRSP US Total Market Index which broadly represents the entire US equity market. S&P 500 is another popular index that is broad-based but it includes only the top 500 companies and hence represents approximately 80 per cent of the total value of the US stock market. Then there is the Nasdaq 100 index which comprises the 100 largest non-financial companies listed on the Nasdaq stock exchange.

Driven by the stupendous rally in the US tech stocks lately, Nasdaq 100 has outstandingly beaten the other two broader indices. It is because of this reason, many fund houses have recently launched their Nasdaq 100 offerings. However, these stocks also tend to be more volatile. So, if one wants to bet on US equity but in a much broader manner, then CRSP US Total Market index or S&P 500 index fit the bill. We compared their five-year rolling returns and found that these two have almost shown the same performance in the last five and a half years.

About the AMC
After acquiring the Essel Mutual Fund in April last year, Navi Mutual Fund launched its first product, the Navi Nifty 50 Index Fund in July 2021. Navi Mutual Fund manages Rs 943 crore of AUM across debt, equity and hybrid funds as of December 2021. Of this, Rs 167 crore belongs to Navi Nifty 50 Index Fund, and the rest is primarily the legacy of Essel Mutual Fund.

The AMC has launched two more passive funds last month - Navi Nifty Next 50 Index Fund and Navi Nifty Bank Index Fund and has many more schemes lined up as per the offer documents filed with SEBI. Low expense ratio and passive focus are the two USPs of this fund house.

Also read: Three questions you should ask before investing in an NFO