Weekly Musings – NFO Pick (Baroda BNP Paribas Nifty 50 Index Fund)

15 Jan 2024 , 11:47 AM

What is the Nifty 50 Index Fund

The Nifty 50 index fund is a passive fund that is benchmarked to the Nifty 50 index. The portfolio of the index fund exactly replicates that of the underlying index in the same proportions. As a result, the returns on the index fund are almost akin to that of the Nifty 50 index. In the index, the index fund, the focus of the fund is not to beat the index, but just replicate the index. The accent is on reducing the tracking error so that the index fund replicates the index as closely as possible. The index fund reduces the cost of fund management substantially, which translates into lower TER (total expense ratio). This eventually enhances returns. Unlike the index ETF, the index fund does not require the investor to have a trading account and demat account to be able to buy the index fund.

Get the power of passive investing

The Baroda BNP Paribas Nifty 50 Index Fund is a passive funda and here are some of the benefits of investing in a passive fund.

1. Passive funds are easy to understand even for a layman. There are no sophisticated strategies or fund manager bias. Passive investments like index funds and index ETFs only track or replicate an index, the Nifty in this case.

    

2. Passive funds are not only elegant, but also efficient. Firstly, the index reflects the collective wisdom of the market and so obviously, the index fund also reflects the collective wisdom of the market. And the market is never wrong.

    

3. Passive funds are economical in terms of cost. That is because, the costs of running a passive fund are much lower and that gets transmitted to the customer in the form of lower total expense ratios (TER). 

    

4. The passive fund is a classic example of rule-based investing. After all, the index is a rule based portfolio and when you buy an index fund, you are indirectly adhering to the rules and philosophy of the index. 

Above all, index funds have delivered the goods in the Indian context, and that matters!

How an index fund differs from an index ETF?

Here are some of the key differences between index fund and the index ETF.

• The index fund is like any mutual fund and does not require a trading account and demat account. You can buy or sell ETFs without trading account and demat account.

   

• The ETFs are traded on the stock exchanges and hence market liquidity is the key to buying and selling ETFs. In index funds, the liquidity is provided by the AMC.

   

• In an index fund, there are only fund management charges (TER). In index ETFs, apart from TER, you bear brokerage, demat charges, statutory charges, and liquidity costs. 

   

• Index funds are for buying from the AMC while in the case of ETFs, one can even do intraday trading. This could, at times, engender a short term approach in investors.

   

• It is possible to structure a SIP on an index fund. However, it is not possible to structure SIPs on index ETFs as it is a market product and cannot be administered.

   

• Index ETFs can only be held in demat account while index ETFs can be held in statement form and, if necessary, then in demat form too. 

Index ETFs do not need demat account and trading account and is suitable for conservative investors, who are not comfortable with exchange traded products.

Is the Nifty overvalued; not exactly!

With the Nifty and Sensex at lifetime peaks, there are concerns that the markets may be stretched. Let us look at some key data points.

• The Nifty price earnings (P/E) ratio currently stands at 22.3X while the 10-year average P/E of the Nifty stands at 24.4. That means, the P/E is still below the long term average.

   

• The Nifty price book (P/B) ratio currently stands at 3.7X while the 10-year average P/B of the Nifty stands at 3.6. That means, the P/B is at par with the long term average.

   

• The Dividend Yield (DY) ratio currently stands at 1.3% while the 10-year average P/E of the index is also at 1.3%. That means, dividend yield is at par with long term average.

   

• On a 15 year basis, the Nifty has a return to risk ratio of 0.83X, while it is 0.85 for 10 years and 0.86 for 5 years. Clearly, the Nifty has compensated for the risk factor.

   

• If you look at the total returns index (TRI) over the last 18 years, then the Nifty has given positive returns in 15 of these 18 calendar years, showing low downside risk.

   

• Don’t worry about timing the market. Had you invested in the Nifty in any random period of 7 years in the last 18 years, your probability of earning over 10% is 74.1%.

   

• Had you done a SIP on the Nifty over the last 5 years, 10 years, or 15 years; your minimum CAGR returns would have been an impressive 13.3%.

The moral of the story is that the Nifty remains a great asset class to invest in.

Performance of multi asset allocation funds in India

Here is a quick look at the best performing index funds and index ETFs benchmarked to the Nifty or the Sensex as of January 12, 2024. Returns beyond 1 year are CAGR returns.

Index Fund / ETF Scheme Name	NAV (₹) Regular	Returns (%)  1-Year	Returns (%)  3-Years	Return (%) Since Launch	Daily AUM  (₹ crore)
ICICI Prudential Nifty50 Equal Weight Index Fund	13.76	31.41		28.39	35.05
HSBC Nifty 50 Index Fund	24.92	23.37	15.25	27.63	227.55
360 ONE ELSS Tax Saver Nifty 50 Index Fund	12.10	22.87		20.08	54.96
HDFC NIFTY50 Equal Weight Index Fund	14.85	31.68		17.88	905.81
Aditya Birla Sun Life Nifty 50 Equal Weight Index Fund	15.16	31.57		17.36	224.63
ICICI Prudential S&P BSE Sensex ETF	809.15	22.67	14.93	16.95	4,870.24
DSP Nifty Next 50 Index Fund	21.13	30.64	17.04	16.52	382.94
Tata Nifty 50 ETF	231.39	23.75	15.81	16.39	594.09
Mirae Asset Nifty 50 ETF	230.96	23.86	15.84	16.21	2,041.96
DSP Nifty 50 Index Fund	20.84	23.38	15.37	16.19	469.44
Motilal Oswal Nifty 50 Index Fund	18.27	23.19	15.10	16.01	407.82
Tata Nifty 50 Index Fund	134.68	23.10	15.18	15.91	587.49
Aditya Birla Sun Life Nifty 50 Index Fund	218.73	23.17	15.12	15.56	736.61
HDFC S&P BSE Sensex ETF	798.90	22.63	14.91	15.43	491.20
Bandhan S&P BSE Sensex ETF	772.61	22.16	14.44	15.34	1.08
HDFC Nifty 50 ETF	239.30	23.85	15.85	15.21	3,133.89
DSP NIFTY 50 Equal Weight ETF	275.46	32.68		15.17	131.12
HDFC Index S&P BSE Sensex Fund	662.47	22.12	14.45	15.11	6,438.16
ICICI Prudential Nifty 50 Index Fund	217.07	23.32	15.32	15.10	6,612.39
HDFC Index Fund Nifty 50 Plan	204.67	23.37	15.38	15.07	12,075.64
Bandhan Nifty 50 ETF	234.88	23.81	15.70	15.05	21.90
LIC MF S&P BSE Sensex ETF	796.76	22.51	14.82	14.70	756.12
UTI Nifty 50 ETF	235.34	23.86	15.84	14.60	47,815.62
ICICI Prudential Nifty 50 ETF	240.52	23.89	15.87	14.60	10,979.89
LIC MF Nifty 50 ETF	238.44	23.66	15.76	14.59	800.01
Axis Nifty 50 ETF	235.06	23.89	15.85	14.57	528.07
UTI S&P BSE Sensex ETF	780.09	22.60	14.37	14.48	36,315.75
Navi Nifty 50 Index Fund	13.98	23.42		14.38	1,429.09
ICICI Prudential S&P BSE Sensex Index Fund	23.33	22.09	14.41	14.36	1,305.72
SBI Nifty Index Fund	191.00	23.24	15.20	14.35	5,977.03
Kotak Nifty 50 Index Fund	14.07	23.08		14.25	529.30
DSP Nifty 50 ETF	223.70	23.86		14.06	98.24
LIC MF S&P BSE Sensex Index Fund	135.37	21.34	13.73	13.65	81.99
Aditya Birla Sun Life S&P BSE Sensex ETF	71.00	22.61	14.88	13.39	455.71
UTI S&P BSE Sensex Index Fund	12.76	22.16		13.34	172.34
DSP Nifty 50 Equal Weight Index Fund	21.55	31.81	20.97	13.13	1,015.14
LIC MF Nifty 50 Index Fund	120.54	22.63	14.54	13.01	277.11
Franklin India NSE Nifty 50 Index	174.46	22.87	14.94	12.96	620.86
SBI Nifty 50 ETF	228.62	23.85	15.83	12.94	1,72,835.61
Axis Nifty 50 Index Fund	12.87	23.32		12.69	379.18
Invesco India Nifty 50 ETF	2,438.52	23.79	15.79	12.66	78.76
Aditya Birla Sun Life Nifty 50 ETF	24.88	23.88	15.88	12.65	2,034.02
Nippon India ETF S&P BSE Sensex	809.43	22.69	14.91	12.61	4,282.41
UTI Nifty 50 Index Fund	148.16	23.47	15.53	11.96	15,067.63
Bandhan Nifty 50 Index Fund	46.69	23.12	15.20	11.89	1,109.72
Kotak S&P BSE Sensex ETF	77.54	22.30	14.64	11.60	27.69
Taurus Nifty 50 Index Fund	41.57	21.99	14.80	11.07	3.28
Motilal Oswal Nifty 50 ETF	222.33	23.86	15.85	10.88	39.01
Nippon India Index Nifty 50	36.69	23.11	14.81	10.27	1,265.21
Nippon India Index S&P BSE Sensex	36.46	21.77	14.17	10.22	596.17
Edelweiss Nifty 50 Index Fund	12.33	22.98		9.70	29.12

Data Source: AMFI India

Currently, generic index funds and ETFs (Nifty and Sensex) manage around Rs3,47,350 crore (Rs3.47 trillion) in terms of AUM. If you look at the performance, all funds have given positive returns over a 1 year period, over a 3 year period and also since inception. This is largely on account of the outperformance of equity as an asset class compared to other assets post the pandemic. However, index funds are not just about returns but also about risk diversification. If you look at index funds, they have given CAGR returns since inception of 14.75% on an average, which is extremely impressive. However, if you look at these index funds and index ETFs in terms of 1-year returns, average returns would be around 24.08%. 

This is impressive, but may not be realistic over a longer period when indices tend to be cyclical. The reason is that there is lot more variation in the returns on the fund over a longer time frame. It is not surprising that a lot of the net inflows into mutual funds (especially large cap funds) is gravitating towards index funds and index ETFs. How are the variation in returns? Over a 1 year period, returns of index funds and index ETFs range from 32.68% to 21.34%. In terms of returns since inception, the range is from 28.39% to 9.30%.

Glance at the Baroda BNP Paribas Nifty 50 Index Fund NFO

Here are some details of the Baroda BNP Paribas Nifty 50 Index Fund NFO you must know to decide on investing in the fund.

1. The NFO of Baroda BNP Paribas Nifty 50 Index Fund has opened for subscription on January 08, 2024 and the NFO subscription will close on January 22, 2024. Being an open ended fund, the fund house will offer purchase and redemption at NAV linked prices.

    

2. The Baroda BNP Paribas Nifty 50 Index Fund NFO offers an opportunity to investors to diversify across asset classes through a single fund at a lower cost. Being an index fund, it does not have any unsystematic risk, which makes it more conservative.

    

3. Entry loads do not exist in India. In terms of exit loads, if you redeem within 30 days, then it attracts exit load of 0.20% on redemption value. This also applies if holdings are switched to another fund within 30 days. Beyond 30 days, there is no exit load.

    

4. Let us turn to minimum investment in the NFO. Investors can put in applications for a minimum of Rs5,000 and in multiple of ₹1 thereafter.  The fund offers Regular and Direct plans for the investors. In addition, investors can either choose the Growth option or the IDCW (income distribution cum capital withdrawal) option. 

    

5. How will the fund be benchmarked? The benchmark for the fund will be benchmarked to the Nifty 50 TRI (total returns index). The fund managers for the Baroda BNP Paribas Nifty 50 Index Fund will be Neeraj Saxena.

    

6. The investment objective of the fund is to replicate the Nifty performance and investors must look at a time frame of 5 year or more to get full benefits of this fund. Despite being an index fund, it is classified as a high risk fund due to market volatility risk.

The Baroda BNP Paribas Nifty 50 Index Fund NFO is an opportunity to benefit from a diversified portfolio of large cap pedigreed stocks without taking on stock selection risk, asset allocation risk or even unsystematic risk.