In the latest development in the fund industry, Boston (US) based fund house Fidelity has launched two passively managed tracker funds (commonly known as index funds in India) with no cost at all. Surprisingly, the fund house has launched these zero TER index funds for retail investors.
Experts believe that the fund house would lend stocks to short sellers to make money. In India, SEBI allows fund houses to lend stocks but it is not a widely prevalent practice among fund houses.
A Mumbai RIA who also runs an offshore advisory business told Cafemutual that many fund houses in developed markets lend stocks and use synthetic replication strategy to reduce costs. “While they earn interest through lending stocks to short sellers, in synthetic replication, instead of holding any holding any underlying securities, funds use derivatives to track underlying index to their cost next to negligible. However, both these models are not prevalent in India,” he adds.
So far, Vanguard and Charles Schwab have been running cheapest index funds with TER of 0.14% and 0.09% respectively. Their ETF counterparts are even cheaper at 0.04% and 0.03%.
In India, most fund houses charge just over 0.40% in direct plans of index funds and 0.05% in ETFs. We spoke to a few experts to understand if it makes sense for Indian fund houses to look at such funds.
Vishal Kapoor, CEO, IDFC Mutual Fund believes that this model will not work in India since it is ahead of its time. Citing an example of NPS, he said, “We have a low cost retirement fund which is yet to take off. If you look at the assets of NPS, over 90% of contribution has come from central and state government largely due to lack of awareness and low incentives for distribution. Also, if a fund house launches such a fund, only direct plan investors would be interested in buying this fund, which is very small proportion today. In my view, this is not a win-win model and does not make any business sense.”
A CEO of a top national distributor company said that such funds are not relevant in India. “You cannot compare Indian markets with developed markets as alpha generation is very challenging in such countries. Investors in developed nations have huge exposure to passive funds and hence, fund managers need to justify their charges on active funds,” he added.
Mumbai RIA, Suresh Sadagopan of ladder7 wealth advisories is also sceptical about the fund and said, “You may not want to go to a restaurant where you get a free masala dosa. Reason: Chances are high that you will not get good quality food and service experience. In addition, you cannot hold the restaurant responsible if anything goes wrong with the food. Simply put, many manufacturers are too concentrated on reducing cost. However in reality, an investor does not care about cost. He just want his money to grow. In my view, such a model is not sustainable and the fund house will have to wait for very long time to make some sense out of it.”