- Cheapest fund in terms of NAV value
- Cheapest fund in terms of CAGR returns
- Cheapest fund in terms of risk adjusted returns
- Cheapest fund in terms of the Total Expense Ratio (TER)
Obviously, the first option is just too unscientific. Whether the equity fund is quoting at a NAV of Rs8 or Rs90 hardly matters. What matters is the quality of the portfolio that the fund holds and the performance of the fund in the past? Of course, the last one year has also highlighted the importance of factoring in risk while evaluating equity funds.
Cheapest equity funds in terms of CAGR returns
The best way to buy a cheap fund is to look at funds that have given the best returns in the last five years. Such funds hold the best promise and can be considered relatively attractive compared to other funds. However, it needs to be remembered that past returns may not be indicative of future returns; only suggestive. We have only considered growth schemes of Regular Plans here.
|Fund Name||1-Year Returns (%)||3-Year Returns (%)||5-Year Returns (%)|
|Quant Focused Fund (G)||-3.29%||8.23%||13.59%|
|Mirae Large Cap (G)||4.61%||12.36%||13.31%|
|Axis Blue Chip Fund (G)||1.83%||12.97%||11.23%|
|Reliance Large Cap (G)||3.51%||11.12%||11.20%|
|SBI Bluechip Fund (G)||0.01%||7.29%||10.92%|
When you try and select the cheapest funds based on returns look at two things in particular. Ensure that the returns are considered over a five year period since that is more suggestive of the capacity of the fund to perform in the long run. After all, equity fund investments are all about the medium to long term. Secondly, look for consistency. Funds that deliver high returns over a five year period but negative returns in a short term frame are too much into beta. Similarly, funds where short term returns are better than long term returns are also risky as they entail greater market risk and company specific risk to generate higher returns in the short term. An investors needs to be cautious.
Cheapest equity funds in terms of risk adjusted returns
Risk adjusted returns can be looked in different ways. For example, one can just look at risk as a static measure. Here, Beta measures the systematic risk and standard deviation measures the overall risk. But better ways are risk adjusted returns. The Sharpe ratio calculates excess returns for every unit of total risk while Treynor Ratio calculates excess returns for every unit of systematic risk. The use of Sharpe Ratio is more popular and hence we have ranked the funds on the Sharpe ratio, so that you can select funds based on returns after factoring in the risk element too.
|Scheme Name||Standard Deviation||Beta||Sharpe Ratio||Treynor's Ratio|
|Mirae Asset Tax Saver Fund (G)||13.14||0.98||0.92||0.12|
|Mirae Asset Emerging Bluechip Fund (G)||14.32||0.76||0.76||0.14|
|Mirae Asset Large Cap Fund (G)||12.39||0.96||0.74||0.10|
|Kotak India EQ Contra Fund (G)||11.78||0.92||0.70||0.09|
|Reliance Large Cap Fund (G)||13.08||0.98||0.68||0.09|
|Canara Robeco Equity Diversified (G)||12.53||0.95||0.68||0.09|
|HDFC Top 100 Fund (G)||13.68||1.02||0.66||0.09|
|DSP Natural Resources Fund (G)||16.45||1.00||0.64||0.12|
|HDFC Equity Fund (G)||14.82||1.07||0.62||0.09|
|Taurus Taxshield (G)||12.62||0.96||0.58||0.08|
|HDFC Small Cap Fund (G)||15.76||1.00||0.58||0.09|
How does this make the top funds cheap? That is an interesting nuance to understand. How do you compare a fund manager who generates 18% with 50% standard deviation versus another fund manager who generates 16% returns with 15% standard deviation? Even intuitively, you can say that the first fund manager is just taking on too much risk to earn that excess return of 2%. This logic is captured numerically by Sharpe Ratio. Sharpe reduces your cost by focusing on risk adjusted returns than on pure returns.
Cheapest equity funds in terms of Total Expense Ratio (TER)
Over the last one year, the regulator has made an earnest attempt to bring down the cost with the peak cost coming down from 2.5% to 2.25%. However, there are still other costs. For example, there is a 30bps incentive for selling in mofussil towns and that adds up to the total cost of the fund. In addition, the GST paid by the AMC on the fund fees can also be charged back to the fund as costs. All these take the fund costs higher. In this ranking of lowest cost funds, we will only consider non-index large cap equity fund and we will ignore the Direct Plans. We have only considered costs of 1.50% and above.
|Fund name||Total Expense Ratio (TER)|
|Edelweiss Large Cap Fund (G)||1.66%|
|SBI Bluechip Fund (G)||1.70%|
|Mirae Asset Large Cap (G)||1.76%|
|Reliance Large Cap Fund (G)||1.77%|
|Aditya Birla Frontline Equity (G)||1.78%|
|L&T India Large Cap Fund (G)||1.83%|
|ICICI Pru Bluechip (G)||1.84%|
|Franklin India Bluechip (G)||1.87%|
|HDFC Top 100 (G)||1.88%|
|Axis Blue Chip Growth (G)||2.08%|
In his 2016 AGM Note, Warren Buffet hailed Jack Bogle’s contribution to retail investors for saving nearly $1 trillion for American investors over the last 50 years in the form of lower costs. Even in diversified equity funds it is possible to keep your TER low. That is what low cost investing is all about! In the long run, it makes a big difference to your returns.