Equity index funds witness a steep rise in their expense ratios | Value Research Expenses are an important factor when choosing an index fund. Let’s see how the expense ratios have been for these funds.

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Expenses are an important factor when choosing an index fund. Let's see how the expense ratios have been for these funds.

We are going through some tough times as consumers. With inflation on the boil, the prices of just about everything are on the rise. So, while you feel the pinch of rising expenses, some segments of mutual fund products are adding to your woes. And the irony is that these are the funds whose low cost is supposed to be the very premise their investment case is built upon. We are talking about index funds!

Over the past year, the direct plans of several equity index funds have witnessed a steep rise in their expense ratios. In some cases, the expenses have doubled or even more! And these are not index funds on the fringe but the biggest ones available and they track the mainstream NSE Nifty 50 and BSE Sensex indices. Generally, the funds tracking the niche strategy-based indices tend to charge higher expense ratios.

What's also noteworthy is that it is mainly the direct plans which have witnessed a rise of this magnitude while in the case of regular plans, the increase is of a much moderate proportion.

A sharp rise in expenses is not a pretty sight for investors, but to be fair the business dimension can also not be ignored. Our conversations with some prominent passive fund managers suggest that 18-20 basis points (for the direct plans) is indeed the threshold expense level needed to make these products viable.

But then, you also have a new player like Navi Mutual Fund whose Nifty 50 index fund is available at an expense ratio of just 0.06 per cent (direct plan).

So, what we have is a passive funds space at the cusp of divergent trends. On one hand, we have the incumbents trying to build out their passive products while keeping them economically viable, and on the other are newer players who are vying to disrupt this space by offering ultra-low-cost products.

While the equity index funds have been hitting hard on the expense side, their popularity has been on a rise. The assets managed by these funds have more than doubled over the past one year (as on March, 2022), although on a smaller base, while the actively managed equity funds have been witnessing moderate growth in their assets.

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