Zerodha's entry to Mutual Fund Business

Zerodha on 1st September got the in-principle license to launch its mutual fund business from SEBI. This is different from Coin where you can invest in mutual funds schemes. This license is all about creating their own mutual fund scheme where you can invest it in directly.

If you do not know Zerodha is India's largest discount broker where you can invest in stocks, derivatives, mutual funds and more.

PC: Zerodha.com

Along with Zerodha, Navi which is again a startup is in the process to create passively managed schemes. So now we have two new entries which are coming to disrupt the mutual fund businesses in India. Before knowing how they will disrupt the market, let's know that what is actively managed mutual fund and passively managed mutual fund.

Active funds - In this type of mutual fund, there is an active fund manager who decides when to buy and when to sell which means he brainstorm and pick profitable investments so that the fund outperforms the benchmark or the index. The active funds usually charge more in terms of expense ratio because it needs analysts and researchers as well as fund managers who do buy and selling the stocks to achieve maximum returns. Any fund which is actively managed by a fund manager is an active fund.

Passive funds - In this type of fund, the fund tracks a market index like nifty or Sensex to allow a fund to fetch maximum gains. In this fund manager does not actively choose what stocks the fund will be comprised of. The passive fund is easier to invest than inactive funds also they are less expensive than the active mutual fund.

So now since we know what is active funds and what is passive funds, let's continue our discussion on why Zerodha and Navi can disrupt the mutual fund industry. One thing to note is that if you check which is better active funds or passive funds, anyone will tell passive funds because, in the long run, very few active funds are able to beat the indices and thus as an investor we do not have to jump funds to funds to get maximum returns when we can just get the returns at the index level. Recently Navi Nifty50 index fund has been rolled with the direct plan carrying an expense ratio of just 0.06 per cent whereas the active mutual fund expense ratio is somewhere between 0.5 to 1.5 %, which is huge in the longer run.

Also, the best thing about passive funds is that it is very easy to invest and thus in the last 5 years passive funds assets have been increased more than 10 times. Along with that, they will make the existing fund houses rethink their strategy that if new-age companies can do it then why can't they.

PC: Pixabay.com

How to choose what is best for you?

Say for example today you have started working on creating your portfolio and have taken the best funds available which has a great rank and is giving good returns from the last 3 years. Now after three years, those funds which you have selected is not able to outperform the indices for a variety of reasons so you want to redeem and invest in today's great funds. In the process you have to pay the expense ratio, you have to pay tax on capital gain and also you have to spend your time in research. If you do not want to take the headache of doing all this than you can go to the passive fund and thus leave the fund to grow until your goal is met because you know that your funds will behave according to the market and thus you can redeem it any day without thinking about big expense ratio.

Now if you still want to go to the active funds is because you are trusting the active fund managers because he is taking the responsibility to give the best returns to you by doing all the research, and who knows the selected mutual fund can beat the indices by a big margin.

The only thing you have to choose is which fund you have to invest and then start investment from today.

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