June 20, 2015

Investing in NIFTYBEES versus regular Mutual Funds

NIFTYBEES is an ETF (Exchange traded fund). This is a "passively" managed fund where the fund manager has no job except to simply invest the money in a certain proportion as defined in the index (in our case NIFTY). This obviously means that as there is no research involved, the costs are less so the overall management fee drops down substantially. The fee is very low at 0.50%.

An additional benefit is that ETFs are traded realtime on the exchange so you can buy and sell whenever you want just any any other stock.

Regular mutual funds are "actively" managed. This means you have a fund manager with a team who do all kinds of research, visits etc and then decide where to invest as per the guidelines of the specific scheme. This involves costs so expect to pay 2-3% per year as management fees whether the fund performs or not. This is the killer.

Now the problem with actively managed mutual funds is two fold. One, the fund manager has a significant role as the fund performance depends on how good he/ she is. This becomes subjective (for a would be investor) specially if one assumes that any over performance is due to sheer randomness and not any skill. The other is the high management fee - this is understood best in rangebound markets where the index gains nothing loses nothing over 5 years but you have anyway lost at least 10% because of management fees.

The global experience also throws another interesting fact. It is extremely difficult to beat the index - this means that you are generally paying a lot in management fees which can be saved by simply investing in an ETF.

To summarize, do consider investing some of your funds in ETFs like NIFTYBEES. Preferred route is SIP over a 4-5 year time frame.

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