Zerodha Fund House Launches Two New Mutual Fund ETFs In Largecap & Midcap Segment; BUY?

In the Indian mutual fund space, Zerodha Fund House, the country's 38th largest fund house with Rs 1,236 crore in assets under management, has announced two new mutual fund schemes. The launch, which took place on May 27, introduces the Zerodha Nifty 100 ETF (ZN100) and the Zerodha Nifty Midcap 150 ETF (ZM150) to the market. These additions reflect Zerodha's ongoing strategy to expand its portfolio and offer investors a diverse range of investment options.

The Zerodha Nifty 100 ETF (ZN100) and Zerodha Nifty Midcap 150 ETF (ZM150) cater to different segments of the market. The ZN100 is a large-cap scheme, focusing on the 100 largest stocks by market capitalization, while the ZM150 targets the next 150 largest companies, categorized as midcap stocks. Both schemes are exchange-traded funds (ETFs), meaning they can be bought and sold only on the stock exchanges. Direct transactions with the fund house are possible only if you hold 7.55 lakh units or more.

Since its inception in November 2023, Zerodha Fund House has been steadily building its suite of investment options. Initially, it launched a tax-saver index fund and a large and midcap fund. Earlier this year, Zerodha introduced its liquid ETF and gold ETF. The latest launch of ZN100 and ZM150 continues this trend of creating foundational investment schemes.

The launch of ZN100 and ZM150 taps into both established and emerging categories within the mutual fund market. There are currently about 91 passively managed large cap schemes, making ZN100 a relatively common offering. However, the midcap passive scheme category, where ZM150 fits, is still developing, with only 16 existing funds.

One aspect that could set ZN100 and ZM150 apart is their expense ratio. In the space of large cap oriented passive funds, expense ratios average around 0.40%, with some ETFs charging as little as 0.03 to 0.04%. While low expense ratios can be appealing, it's essential to consider them within the context of regulatory standards and overall fund performance.

ETFs, by their nature, tend to have lower expense ratios compared to actively managed funds. Given that active fund managers have struggled to consistently outperform benchmark indices in recent years, many experts advocate for passive funds for large cap exposure. This trend bodes well for ZN100, which can serve as a reliable addition to a diversified portfolio.

On the midcap front, passive funds have shown promise. There are three main types of midcap passive funds: those tracking the top 50 midcap stocks in the Nifty 150 midcap index, those tracking 100 midcap stocks, and those tracking the full Nifty 150 midcap index, like ZM150. For investors looking to diversify their portfolios with midcap exposure, ZM150 offers a compelling option.

Despite their potential, ZN100 and ZM150 do not bring anything particularly groundbreaking to the table. As basic schemes, they face stiff competition from numerous existing funds with established track records and varying expense ratios.

Moreover, the nature of ETFs presents a limitation: they do not support Systematic Investment Plans (SIPs). SIPs are a popular investment strategy in India, allowing investors to regularly invest small amounts. The lack of SIP availability with ZN100 and ZM150 could deter potential investors who prefer this methodical approach to investing.

Zerodha Fund House's introduction of the Zerodha Nifty 100 ETF and Zerodha Nifty Midcap 150 ETF marks another step in its ongoing expansion and diversification strategy. While the schemes are basic and face significant competition, their success could hinge on competitive expense ratios and the growing appeal of passive investment strategies.

For investors, the choice to include ZN100 and ZM150 in their portfolios will depend on individual financial goals, risk tolerance, and the desire for large cap or midcap exposure.