Some mutual fund houses cut down expense ratio on Nifty 50 ETFs to benefit passive investors

Amid growing investors’ interest in passive funds, some mutual fund houses have curtailed the expense ratio on Nifty 50 exchange traded funds (ETFs), a move that will bring down tracking error and lead to higher returns for passive investors. ICICI Prudential Mutual Fund on Wednesday cut down the expense ratio on its Nifty 50 ETF scheme from 0.05 per cent to 0.0279 per cent, making it the lowest total expense ratio (TER) 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 per cent. In addition, it cut down the TER on its ETF S&P BSE Sensex scheme too.

The other notable names in the category consists of SBI Nifty 50 ETF, UTI Nifty 50 ETF and Nippon India ETF Nifty 50 BeES have an expense ratio of 0.07 per cent, 0.06 per cent and 0.04 per cent respectively.

While investing in ETFs, it is better to opt for ones with 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 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, 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 which offers a combination of lowest tracking error and lowest expense ratio, they added. Over the past three years, there has been an increased investor interest around 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 ICICI Prudential Nifty 50 ETF is available at around Rs 199 and gives exposure to all the 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 one year, the assets under management of the ICICI Prudential Nifty 50 ETF saw a nearly 35 per cent increase to Rs 5,213 crore till April 2023.