Quantum Mutual Fund launching India’s first Nifty 50 ETF Fund Of Fund (FoF) claiming as a new kind of product. As Index funds are gaining popularity among Indians, should you invest in Quantum Nifty 50 ETF Fund of Fund NFO?
We all know that Index Funds are gaining popularity among Indians. Mainly because of clear definitions of funds based on SEBI Recategorization, consistent underperformance of major active funds, low cost, and simplicity.
Mutual Fund companies trying their encash this trend by launching one-by-one Index Funds. However, is it worth considering all these Index Funds just because the tagline is INDEX FUND?
Quantum Nifty 50 ETF Fund of Fund NFO – Should you invest?
I am a staunch believer in index funds. However, at the same time, I am deadly against the gimmick these mutual fund companies create in us by encashing our mood. The classic example is Quantum Nifty 50 ETF Fund of Fund NFO. The reasons are as below.
# Cost –
They have their own 14 years old underlying the Nifty 50 ETF. The cost of this ETF as per their declaration is 0.094%. This is obviously a low cost compared to typical Index Mutual Funds (not ETF to ETF). However, if you invest in Quantum Nifty 50 ETF Fund of Fund, then you have to bear two costs. One is the underlying ETF cost and the second is the Quantum Nifty 50 ETF Fund of Fund cost. Hence, it is a double costing product for us. However, if the total cost is less than the available Nifty 50 Index Funds, then we may say that it is cost-effective. Otherwise, a waste product.
# Taxation –
Earlier I am of the opinion that as it is a Fund Of Fund, the taxation is like Debt Fund. However, one of my blog readers pointed that the taxation of such funds is as like Equity Funds. Because under Sec.10(23D), it was clearly mentioned as below.
- A Minimum of 90% of the total proceeds of such fund is invested in the units of such other fund; and
- Such other fund also invests a minimum of 90% of its total proceeds in the equity shares of domestic companies listed on a recognized stock exchange, and
With this, it is clear that as underlying ETF and this NFO invest at least 90% in underlying ETF and ETF again in Indian stocks means the taxation of this NFO is like an equity fund. This is a positivity of this product (rather than the negativity that I assumed earlier with the wrong notion that taxation is like a debt fund).
# Tracking Error or Tracking Difference –
If you don’t know what is tracking error and tracking difference, then refer to my latest post “Tracking Difference Vs Tracking Error of ETF and Index Funds“. You have to face two types of tracking errors and tracking differences here. One is the underlying ETF tracking error and difference and another is this fund’s tracking error and difference. Look at the latest tracking error and tracking difference of this ETF.
Even though tracking errors and differences look less, your Quantum Nifty 50 ETF Fund of Fund will add more tracking errors and tracking differences. Because they can’t replicate 100% of the tracking error and tracking difference of underlying ETF.
# Liquidity, SIP, and Demat Account –
This product may be pushed to you by saying you will not face any liquidity issues, SIP is possible (but not in ETF), and Demat account requirements like underlying ETF. It is true. However, just by looking at these three features of this product, one can’t ignore the expenses and tracking errors or difference pointers.
Hence, considering more negatives than positives, even though Quantum Mutual Fund company may be claiming this as India’s first Nifty 50 ETF Fund Of Fund, better to IGNORE. Rather either choose the direct ETF (if you are well versed with how it works like selling, buying, and Demat account requirements) or simply select the existing Nifty 50 Index Funds.
I think it is a futile exercise from a mutual fund company by creating a kind of gimmick. Instead, they might have created a simple low-cost Nifty 50 Index Fund.
Always be cautious with the moves of mutual fund companies. If your requirement is genuine, then invest. Else, an upfront NO is far better.