The India Infoline NIFTY ETF can be a game-changer, as expense ratios in actively-managed funds are a major component of costs—and can substantially erode your investment over the long term 

Moneylife Digital Team

India Infoline (IIFL) has launched its NIFTY ETF which will charge annual recurring expense of just 0.25%. Expense ratios of actively-managed funds are as high as 2% p.a. Normally, an ETF’s expense ratio is typically in the range of 0.25%-0.75%.

This unique feature of the fund makes it attractive to investors. Is it worth buying? As a concept, it’s a breakthrough idea. But the question that arises is IIFL being a broking firm, how will it survive with such a low expense ratio? Out of 0.25%, IIFL would get only 0.05% as management fees. Is it that IIFL will be paying out of its pocket—or will it increase the fees once the corporate decision starts hurting?

It is hard to assess what an investment will do for you over the long term. One factor is how much you are spending on having fund companies manage your money. Costs can eat up your returns like termites. By and large, investors pay far too little attention to the costs of investing. When so many costs are hidden (transaction costs, front-end sales charges, taxes incurred on realised gains, etc) or when the stock market returns are high or when investors are focused on short-term returns, the impact of cost over an investment lifetime is ignored. But costs can kill. Here is how. Assume that the stock market generates an average return of 15% a year over 20 years. Now let’s assume that the costs of the average mutual fund are 2.25% a year. Result: a net annual return of just 13% for the average fund. Whereas assume that the cost of another mutual fund is 0.25% a year. Result: a net annual return of just 15% for the average fund.

Funds charging costs of 2.25% a year have to give an average return of 17.2% a year over 20 years to give a net annual return of 15%, which is a tough target to achieve.

What you see here—please don’t ever forget it!—is that over the long-term, the miracle of compounding returns is overwhelmed by the tyranny of compounding costs.

This is where this fund of India Infoline scores. The investment management fee is a ridiculous 0.25% per annum while other actively-managed funds charge you 2.5% a year! Thanks to such low costs, over the long term, compounding will make a massive difference to your returns. All else being equal, an IIFL Nifty ETF investor can make at least 50% more than a fund investor over 20 years only due to low charges.

Thus it is the finest product till date to invest for a long-term basis. The only thing to bear in mind before investing in this product is you should not buy and sell frequently. Since it is an ETF and India Infoline is a broking firm itself, it may recommend you to buy and sell frequently to earn more in terms of brokerage commission—if not management fees.