Low Expense Ratios, High Returns: Why Passive Equity Funds Matter 06Jun2025

 

Low Expense Ratios, High Returns: Why Passive Equity Funds Matter 06Jun2025

 

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(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.) 

 

 

The blog is about equity passive funds and the importance of low expense ratios. Let us restrict ourselves, for the time being, to passive funds that are based on Nifty 50 index, BSE Sensex and Nifty Next 50 index. 

 

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.

 

 

Blog continues below...

 

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Related Blogs on Equity Passive Funds:

 

Crux of Kotak Debt Hybrid Fund  

 

How to Buy Nifty Midcap 150 Index 

 

Equity ETFs and Equity Index Funds Compared

 

India Equity ETFs Worth Considering

 

Analysis of Nifty 100 Low Volatility 30 Index 

 

Nifty BeES: Making Risk-Less Profits 

 

Junior Nifty BeES ETF: How to Make Higher Profits

 

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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. 

 

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. 

 

 

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Mutual Fund Asset Class Returns 02Jun2025 

 

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Mutual Fund Asset Class Returns 31Dec2021

 

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Read more:

 

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Mutual Fund Asset Class Returns 02Jun2025 

 

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JP Morgan Guide to Markets 31Dec2024

 

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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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Mutual Fund Asset Class Returns 02Jun2025

Mutual Fund Asset Class Returns 02Jun2025

 

Follow @vrk100

 

 

(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.) 

 

 

This is an update of an earlier blog posted on 20Oct2024. Now, an analysis of the data as at the end of 2nd of June, 2025, is presented here. The data contain select categories of mutual funds in India, numbering twenty, from equity, debt, hybrid and commodity (gold) categories. 

 

You could also check a previous blog dated 22Apr2024 on the same topic.

 

Table 1: Asset return matrix - Trailing returns (from 3-month to 10-year data as of 02Jun2025) >  

 

Note: three-month data are not annualised; whereas 3-year, 5-year and 10-year data are annualised. 

 

Please click on the image to view better >

 

Table 1 above reveals:

 

> asset class returns are cyclical in nature

 

> In the past one year, gold has delivered the best return of 30.8 per cent of the 20 mutual fund categories selected as above 

 

> gold's outsized return is mainly due to the fact that international gold prices have been reaching all time highs in recent months and it reflects an element of rupee depreciation versus the US dollar

 

> on a 3-year and 5-year basis, equity small- and mid-cap have provided the best returns 

 

> multi asset allocation funds (a combination of equity, debt and gold categories) too have provided decent trailing returns as gold has done well in the past two years and a half 

 

 

Table 2: Asset return matrix - Annual returns - from 2016 to 2024 > 

 

Please click on the image to view better >

 

What table 2 above reveals is:

> gold has provided decent to spectacular returns between 2019 and 2024, except in calendar year 2021

 

> equity international category has done well since 2016, though in calendar years 2018 and 2022, it has not performed well 

 

> however, the best returns, among the select 20 categories, in recent years are from equity mid- and small-cap funds, except in 2022, 2019 and 2018

 

> in calendar year 2024, debt funds have generated decent returns beating inflation, as inflationary expectations have receded and India's central bank, the Reserve Bank of India, had initiated the process of lower interest rate path  

 

 

Mutual Fund Categories with Similar Returns - data as of 02Jun2025

 

Mutual fund categories that tend to provide similar returns over long periods of three years and above are highlighted with thick boxes in the above tables 1 and 2. 

 

As can be observed from trailing returns as well as annual returns, mutual fund categories with similar returns are:

1. Aggressive hybrid and Equity large cap

 

2. Conservative hybrid and Equity Savings (both hybrid category)

 

3. Debt funds namely, Banking and PSU, corporate bond, credit risk, dynamic bond, floater and gilt fund

4. Arbitrage funds (hybrid category) and Liquid funds

 

5. Flexi cap and ELSS funds (both equity category)

 

 

> 3-, 5- and 10-year annualised returns of Aggressive hybrid funds are 16.1, 19.3 and 11.7 per cent respectively; and those of Large cap equity funds are 16.7, 21.4 and 12.3 respectively (see table 1 above)

 

> likewise, 3-, 5-, 10-year annualised returns of Arbitrage funds are 6.6, 5.3 and 5.7 per cent respectively; and those of Liquid funds are 6.8, 5.3 and 6.1 per cent respectively

 

Some caveats:

 

In a calendar year, returns from similar categories can vary significantly; however, over longer periods of three years or more, these returns tend to converge.

The returns of these similar categories are not the same in the short term; but they are similar over longer periods.

There is no guarantee the similarity of returns from these categories will hold true in future periods of time.  

 

Credit risk funds aberration: During calendar years 2019 to 2022, credit risk fund return varied in a big way with other debt funds, like, corporate bond funds and dynamic bond funds. In 2019 and 2020, a handful of debt mutual funds suffered heavily due to debt default by companies, like, Vodafone Idea, Adilink Infra & Multitrading Pvt Ltd others. 

 

And some of the debt funds were forced to undertake side pocketing / segregation of the funds. 

 

As such, average returns for credit risk fund slumped to 0.4 and 0.3 per cent in calendar years 2019 and 2020. However, as some of the funds were able to recover most of the monies, credit risk funds category generated superior returns in 2021 and 2022 making up for the earlier losses.  

 

Tax treatment:

 

In the past five years or so, there have been several changes in capital gains taxes with regard to all mutual fund categories. Investors are better off consulting their tax advisors to better appreciate these capricious tax changes.  

 

Scenario 1: If you're in a 30 per cent+ tax bracket and choosing between arbitrage and liquid funds, consider that both offer similar pre-tax returns. However, arbitrage funds may be more tax-efficient, making them the better choice--if you're comfortable with their equity exposure.

 

Scenario 2: If you're in a 20 per cent+ tax bracket and deciding between Aggressive Hybrid and Large Cap funds, note that both offer similar pre-tax and post-tax returns. This is because Aggressive Hybrid funds invest 65 per cent or more in equities, while Large Cap funds typically allocate over 95 per cent--qualifying both for equity-like tax treatment.

So, how do you choose? From a behavioural standpoint, Aggressive Hybrid funds may be preferable, as they tend to experience smaller drawdowns during market volatility, making it easier for investors to stay invested long term.

 

While hybrid funds may not always outperform pure equity funds in strong bull markets, their behavioral advantages—especially in managing emotions and maintaining investing discipline—can lead to better investor outcomes over time. 

For those prone to reacting emotionally to market swings, hybrid funds offer a valuable blend of growth potential and psychological comfort. 

 

Please check under 'References' at the end of the blog for weblinks of Tweet / X threads on the subject. One can also check other blogs written by the author earlier.  

 

Downside protection: 

 

One key aspect of selecting a mutual fund is to assess whether a particular mutual fund scheme is offering downside protection. 

 

Value Research offers a lot of graphs and tools to investors. For example, please see here and here.  

 

 

Hybrid funds

 

Some hybrid funds, such as Balanced Hybrid, Equity Savings, and Dynamic Asset Allocation (also known as Balanced Advantage), invest in a mix of equity and debt instruments.

When equity markets turn volatile, the debt component in these funds often helps cushion the impact, offering downside protection to the overall portfolio.

From a behavioral perspective, during periods of sharp market declines, investors often panic and exit their pure equity funds, potentially missing out on any future recovery.

In this context, hybrid funds can serve as a psychological buffer in volatile times, helping investors stay invested and maintain a long-term orientation.

 

Certain categories of debt funds have delivered steady returns over longer investment horizons of three to five years. Inflationary pressures are subdued now compared to say, 2010-13 period -- though there were other periods of high inflation during 2020-23 period. 

The falling government bond yields between 2013 and now have enabled bond funds in India to generate decent returns in the past decade.
 

This decent performance enhances the stability of hybrid funds, which invest across equity, debt, and other asset classes. Downside protection is the hallmark of hybrid funds during periods of equity market volatility. 

 

Please check the blog 'Sebi Categorization and Rationalization of Mutual Funds' to know more about the Sebi definition of various mutual fund categories. 

 

 

Key takeaways   

 

The blog provides data on trailing and annual returns of Indian mutual funds over the past 10 years. By analysing this data and doing their own due diligence, investors can make informed decisions about them.

 

It also offers insights into mutual fund categories that have historically generated similar returns over longer periods of say, three to five years. 

 

Since investors fall into different tax brackets, it is important to evaluate post-tax returns and consider the tax treatment of each mutual fund category when making investment choices. 

 

Please note: The mutual funds 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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References:

 

Tweet thread 04Jun2025 Gilt funds vs Dynamic Bond funds - comparison of returns and risk parameters, data interpretation, implications of wider range of dynamic bond funds vs narrow range of gilt funds

 

Tweet thread 04Jun2025 Chasing maximum returns, dopamine rush, ending up with sub-optimal returns, wide range of returns 

 

Tweet thread 04Jun2025 Flexi cap vs Large Cap funds - wide range of  returns on a 1-, 3- and 5-years basis

 

Tweet thread 04Jun2025 Aggressive Hybrid vs Equity large cap funds - downside protection, Best & Worst period returns from Value Research, standard deviation range, risk parameters from Morningstar, etc.

 

Blog 03Jun2025 Mutual Fund Asst Class Returns with similar returns as on 02Jun2025 -  

 

Tweet thread 03Jun2025 Flexi Cap funds vs Equity Savings funds - Best & Worst period returns - drawdown higher for flexi cap funds 

 

Tweet thread 03Jun2025 Equity Savings funds (hybrid category) vs Dynamic Bond Funds - on a trailing basis over 1- to 10-year periods, Equity Savings funds generated superior returns vs Dynamic Bond funds - standard deviation range from Value Research, data interpretation, etc.

 

Tweet thread 02Jun2025 Conservative Hybrid funds vs Equity Savings funds (both hybrid category) - downside protection, Best & Worst period returns from Value Research, standard deviation range, risk parameters from Morningstar, etc.

 

Tweet thread 02Jun2025 Hybrid mutual funds capital gains taxation

 

Tweet thread 25Dec2024 (new Tweets added in Jun2025 also) Debt mutual funds capital gains taxation - LTCG / STCG tax - gilt funds - dynamic bond funds - liquid funds - 

 

 

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Related Blogs on Mutual Funds:

 

 

Mutual Fund Asset Class Returns 30Sep2024 

 

Arbitrage Funds and Avenues 24Jul2024

 

Rapid Growth is Assets of India's MF Industry 18Jul2024

Mutual Fund Categories with Similar Returns 17Jul2024

 

Side Pocketing Episode of Aditya Birla SL Dynamic Bond Fund 17Jul2024

 

Crux of Kotak Debt Hybrid Fund 15Jul2024

India Fixed Income Data Bank 02Jul2024

The Little Secret Behind Nifty Next 50 Index's Recent Success 13May2024

NSE Indices Calendar Year Returns: 2006 to 2024   05May2024

 

How to Buy Nifty Midcap Index 03May2024 

 

NSE Emerging Indices Comparison 31Mar2024 

 

India Passive Funds and Their Asset Size 29Apr2024   

 

Guide to Tracking Error of Mutual Funds 27Apr2204  

 

Gilt Funds Worth Considering! 14Apr2024

 

Select Gilt Funds Performance 05Mar2024

 

Equity ETFs and Equity Index Funds Compared 05Feb2024

 

Indian Equity ETFs Worth Considering

 

Analysis of Nifty 100 Low Volatility 30 Index

 

Quarterly Data of MF Assets 31Mar2023

 

Understanding Corporate Debt Market Development Fund (CDMDF) 

Negative Impact of Debt Mutual Fund Tax Changes 

 

EPFO Investments in Stocks Via ETFs 

 

NSE Indices (Nifty 50, Nifty Next 50, Nifty 100 and Nifty 500) Comparison 31Dec2022

Why Do Indian Equity MFs Always Disappoint Investors?

 

Indian Mutual Funds and the Art of Ripping off Investors

  

Who is Eating My Gold ETF Return?

 

 

Mutual Fund Asset Class Returns 31Mar2024 (MF categories with similar returns)

 

Mutual Fund Asset Class Returns 31Dec2023 

 

Mutual Fund Asset Class Returns 30Sep2023

 

Mutual Fund Asset Class Returns 31Mar2023

Mutual Fund Asset Class Returns 31Dec2022

Mutual Fund Asset Class Returns 30Jun2022

Mutual Fund Asset Class Returns 31Mar2022

 

Mutual Fund Asset Class Returns 31Dec2021

 

-------------------

 

Read more:

 

Blog of Blogs Theme-wise 

 

Weblinks and Investing

 

India Fixed Income Data Bank

 

Indian Economy Data Bank 

India Forex Data Bank 

 

 

Currency Woes Put Pressure on US Equities and Bonds 22Apr2025

 

JP Morgan Guide to Markets 31Mar2025

 

Loss of First-mover Advantage

 

India's Most-Profitable Sectors: Where Big Earnings Are Made 10Mar2025  

 

NSE Indices Comparison 31Dec2024

 

JP Morgan Guide to Markets 31Dec2024

 

Corporate Groups and Listed Companies 29Dec2024

 

Corporate Governance Concerns - Indian Companies 13Dec2024

 

Opinion on Maharashtra Seamless 15Nov2024

 

Wars and Wealth Protection

 

Mutual Fund Asset Class Returns 30Sep2024

 

Primer on Global Capability Centres - India is World's GCC Capital 

 

-------------------

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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