Low Expense Ratios, High Returns: Why Passive Equity Funds Matter 06Jun2025
(This
is for information purposes only. This should not be construed as a
recommendation or investment advice even though the author is a CFA Charterholder. Please consult your financial
adviser before taking any investment decision. Safe to assume the author has a vested
interest in stocks / investments discussed if any.)
In investing life, simple products do well. Passive mutual funds are one of the easiest financial products to understand. Passive funds include ETFs or exchange-traded funds and index funds.
With active funds, fund managers have the freedom to invest in a range of stocks or securities, subject to the investment mandate of a mutual fund scheme.
With passive funds, there is no such freedom for a fund manager to select stocks. The fund manager simply invests in the stocks that are part of an index in exactly the same weighting as the respective index.
With active funds, fund managers have the freedom to invest in a range of stocks or securities, subject to the investment mandate of a mutual fund scheme.
With passive funds, there is no such freedom for a fund manager to select stocks. The fund manager simply invests in the stocks that are part of an index in exactly the same weighting as the respective index.
Blog continues below...
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2. Select Passive Equity Funds and Their Expense Ratios:
Tables 1 and 2 showing list of select equity passive funds (both ETFs as well as index funds) with low expense ratios:
As detailed in a previous article, these select equity passive funds have not only low expense ratios, but also low tracking errors. Both are desirable qualities when selecting equity passive funds.
These are based on three indices only, namely, Nifty 50, BSE Sensex and Nifty Next 50. All data are as at the end of 05Jun2025; except AUM (assets under management) data which are as of 30Apr2025. All Index funds are direct plans.
The following filters are used while selecting the list: funds with AUM of less than Rs 200 crore; funds less than 3-year old and funds with more than 20 basis points (0.20 per cent) expense ratio are removed.
3. Criteria for Selecting Equity Passive Funds
Selection of equity passive funds is easy, though sticking to your investment goals is a tough task.
The important metrics to consider are: low expense ratios, low tracking error, go for funds with reasonable asset size, liquidity (trading volumes and narrow bid-ask spreads, applicable only for ETFs), choose indices suitable for your goals, Fund House reputation and ease of investment (ease of transactions through online and digital platforms).
4. The Case for Low-cost Passive Funds
As you know, markets across the globe have moved strongly to passive funds over the years, both on the equity as well as fixed income side. It has become increasingly difficult for money managers to outperform the performance of indices.
Here are some of the advantages of opting for low-cost passive funds:
Lower expense ratios boost investor returns, without compromising on the market exposure an investor needs. Active funds' returns are eroded by burdensome expense ratios in most cases, as their expense ratios are higher than passive funds.
Portfolio diversification, the only free lunch, can be achieved with simple passive funds.
By holding a diversified basket of 30 to 50 stocks from various sectors and industries, passive funds enable investors to nullify specific risk of an individual stock (unsystematic risk in investing parlance), though market risk (systematic risk) remains.
Even though the stocks in an index are rebalanced periodically, passive funds are easy to understand as they have greater transparency, and their portfolios simply replicate the index.
With passive funds, one can stay invested during market swings as they encourage long-term orientation. From a behavioural perspective too, an investor can avoid the temptation of market timing and emotions, and stick to one's investment goals.
As passive funds are simple products, the simplicity amplifies investor discipline.
With passive investing, you are basically accepting the fact that beating the market is difficult -- this realisation saves investors from overconfidence bias.
5. To Sum Up
In today’s investing world, where every percentage point can make a meaningful difference, costs matter more than ever. That’s why passive equity funds, like index funds and ETFs, are gaining traction among Indian investors too.
With their low expense ratios and market-linked returns, these funds could be powerful tools for long-term wealth creation.
With their low expense ratios and market-linked returns, these funds could be powerful tools for long-term wealth creation.
This blog explores why passive equity funds deserve a place in your portfolio, especially if you're aiming for better returns without the burden of high fees or active management guesswork.
Please note: The mutual funds / investments discussed here are intended solely for informational purposes and do not constitute investment advice. Prospective investors are advised to consult their own financial advisors before making any investment decisions.
Please note: The mutual funds / investments discussed here are intended solely for informational purposes and do not constitute investment advice. Prospective investors are advised to consult their own financial advisors before making any investment decisions.
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Disclosure: I've got a vested interest in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and
opinion provided here are only for information purposes and should not be construed
as investment advice. Investors should consult their own financial advisers
before making any investments. The author is a CFA Charterholder with a vested
interest in financial markets.
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