Amid growing investors' interest in passive funds, some mutual fund houses have curtailed the expense ratio on Nifty 50 exchange-traded funds, a move that will bring down tracking errors and lead to higher returns for passive investors.
ICICI Prudential Mutual Fund cut the expense ratio on its Nifty 50 ETF scheme from 0.05% to 0.0279% on Wednesday, making it the lowest total expense ratio for a Nifty 50 ETF among its peers.
In market parlance, the total expense ratio, or TER, is the total expenses charged by the scheme.
This came after Nippon India Mutual Fund last month reduced the expense ratio on its ETF Nifty 50 BeES to 0.037%. In addition, it cut down the TER on its ETF S&P BSE Sensex scheme too.
The other notable names in the category are SBI Nifty 50 ETF, UTI Nifty 50 ETF, and Nippon India ETF. Nifty 50 BeES have an expense ratio of 0.07%, 0.06%, and 0.04%, respectively.
While investing in ETFs, it is better to opt for ones with the lowest expense ratios, as the operational costs of managing a fund generally reduce the overall return of the portfolio. When two funds track the same index, the one with the lowest expense ratio will tend to produce higher returns over the long run, market experts said.
A lower tracking error indicates that the ETF scheme returns are similar to the index's. Moreover, the expense ratio is one of the factors that directly affects the tracking error.
Since there is no active management in an ETF, it is always advisable to go with the product that offers a combination of the lowest tracking error and the lowest expense ratio, they added.
Over the past three years, there has been increased investor interest in passive offerings, and one of the biggest beneficiaries of this increased investor interest has been the Nifty 50 ETF.
With the latest move, one unit of the ICICI Prudential Nifty 50 ETF is available for around Rs 199 and gives exposure to all 50 stocks in the Nifty 50 index. As a result, investing in a Nifty 50 ETF is one of the cheapest ways to gain exposure to the top 50 names in the listed universe, ICICI Prudential MF said.
Interestingly, over the past year, the assets under management of the ICICI Prudential Nifty 50 ETF saw a nearly 35% increase to Rs 5,213 crore till April 2023.
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