InvestorQ : Which is better to buy a NiftyBEES or Index fund from a mutual fund?
Diya Chitale made post

Which is better to buy a NiftyBEES or Index fund from a mutual fund?

Siya Saran answered.
2 months ago
Nifty BeES was the first ETF (Exchange Traded Fund) in India. The investment objective of Nifty BeES is to provide investment returns that, before expenses, closely correspond to the total returns of securities as represented by the S&P CNX Nifty Index. An index fund, on the other hand, is like any normal mutual fund scheme. The fund manager, instead of selecting stocks and trying to create alpha for you, just creates a portfolio that replicates an index (Sensex or Nifty).

There is no stock selection in the index fund that the fund manager has to do. The only effort the fund manager puts in here is to ensure that the tracking error is kept at the bare minimum. The tracking error reflects the extent to which the index does not mirror the index (higher or lower). Ideally, for index funds, the tracking error should be as low as possible.

There are two things in particular that one needs to compare in order to make the choice between the options-

Tracking error: Simply put, tracking error is the standard deviation of the returns between the fund and its benchmark. A fund that has a high tracking error is not expected to follow the benchmark closely and thereby might result in lower returns than the benchmark.

Expense ratio: An expense ratio is a cost associated with running a particular fund. It includes the management fee and operating expenses like the registrar and transfer agent fee, audit fee, custodian fee, marketing, and distribution fee.  Usually, this cost is annualized. The NAV of each fund is calculated after deducting this expense. 

A quick glance at the historical data of NiftyBeEs and several Index funds will show you that the expense ratio is the lowest for Nifty BeEs. Additionally, in most cases, the tracking error is the least in Nifty BeEs. Thus, just based on these two parameters, Nifty BeEs have the upper hand. 

However, from an investor’s perspective, you may have several other prerequisites. For eg- you may want to invest through small monthly installments rather than the lump sum. This is possible in Index funds but not in ETFs. Or you may not have a Demat account. ETFs are listed on the exchanges and can be traded during open market hours. However, you require a Demat account for carrying out these transactions. Both the investment avenues have their own pros and cons. It is solely upon you to decide which options work better for your financial goals. Nifty BeEs do give dividends that are directly transferred to your bank account.