The Hindu Business Line : Index funds have wide-ranging expense ratio

Kolkata April 2 Expense ratios for index funds — funds that passively mirror specific indices without attempting to outperform them — are fairly wide ranging, with some of them at well above 1.5 per cent.

The disconnect between the two extremities becomes even more obvious if individual cases of high and low are considered.

For a select few, expense ratios are more than 2 per cent — as high as or higher than certain actively-managed products. At the other end of the spectrum, are funds characterised by low expenses, even less than 0.5 per cent.

The former group, according to figures compiled by Value Research, includes LIC MF Index Sensex (2.37 per cent) and SBI Magnum Index (2.11 per cent). The latter includes funds offered by Benchmark MF, which specialises in exchange traded funds (ETFs).

High expenses

Included among those with expenses on the higher side are HDFC Index Nifty, Tata Index Nifty and Reliance Index Sensex. For each of these, it is roughly 1.5 per cent.

As investment circles point out, expenses (the percentage of assets that is used to cover expenses stemming from a fund's operations) are important for unit holders because these can eat away their returns. Expenses mainly arise because of management and operating costs. The latter are incurred due to factors like transaction fees.

For an actively-managed fund, expenses are likely to be higher than that for a passively-managed one, sources say, while referring to the low-cost operations that are assumed to characterise index funds.

Lack of variety

Some of the really low-cost ones are Bank BeES (offered by Benchmark MF, which, incidentally, was the largest player in this group, with Rs 4,472 crore as on February 28) and UTI Sunder. Their expense ratios were 0.45 per cent and 0.50 per cent, respectively.

With index funds numbering only a little over 20, there is a marked absence of variety for index buffs, sources maintain, adding that this scenario is irrespective of the multiplicity of investment styles (and, therefore, indices) that exist in the market today.

Mid-caps, which have drawn considerable attention in recent times, are not for them, because no fund house offers an index product based on, say, BSE Midcap index. At another level, even some of the older players — this set includes indigenous groups like Kotak, JM and Sundaram as well as bank-promoted outfits like Standard Chartered MF and HSBC MF — have no index-based product in their stable.

Low asset base

Index funds continue to be brushed off in India, their generally low asset base underscoring the indifferent manner in which they are being treated by the MF industry. The just-concluded financial year, 2006-07, is no different in this regard.

Sources refer to the modest overall assets managed by the limited number of funds that make up the index universe. Barring Benchmark MF , these are all focused on either the S&P CNX Nifty or the BSE Sensex, the country's two leading indices.

It is not that the older funds in this category are larger in size.

UTI Master Index, launched in mid 1998, had just about Rs 45 crore under management in end-February. This fund, which mirrors Sensex, has provided 17.5 per cent since inception. Principal Index, which replicates Nifty, had made an even lower Rs 10.48 crore as on that day. Its returns since launch stood at 13.87 per cent.