JuniorBees NFO: Is there a case for investing?

ETF Index

From February 18 to 28, a New Fund Offer (NFO) for the new scheme from Reliance Mutual Fund is going on. This mutual fund scheme is a Fund of Fund – FoF. This means it is created to invest in other already existing mutual funds. Globally this format was created to invest in the choicest funds at a low cost with keeping updated funds automatically chosen. However, this FoF does not fit that category and it is investing in only one scheme – Reliance JuniorBees ETF. Let’s see the context and suitability for this new entrant.

There is a prominent trend going on in the domain of fund management. After SEBI’s new definition of large-cap being top 100 companies, it is extremely difficult for the large-cap funds to beat or even match the index performance. Worldwide also the Exchange Traded Funds – ETFs are becoming a better alternative to the mutual funds because of better returns at lower expense ratio.

ETFs Demystified

Exchange Traded Funds are just like mutual funds with mostly passive index-investing. They are traded on stock exchanges just like stocks and bonds during trading hours. They don’t have end-of-the-day NAV, but market price impacted by liquidity also. Being passive investment and exchange-traded, their expenses are lower compared to mutual funds. They target matching the index performance. The fund manager risk is lower as there is no security selection involved. There are also index-funds pausing a competition for ETFs. They are passive mutual fund schemes tracking an index. They have expenses lower compared to active funds and higher than that of ETFs.

Nifty Next 50: Waiting list of Nifty 50

Among the top 100 large and liquid stocks on NSE, top 50 are part of Nifty 50 and the rest are in Nifty Next 50. Thus these are the stocks with strong growth prospect and generally, 85% of them make it to Nifty 50. Now if an investor wants to participate in the growth story of Nifty Next 50, one of the best options is Reliance JuniorBees ETF.

As ETF is bought from the secondary market, it does not have SIP facility. So, those willing to invest every month will have to buy using a trading account every month. This is indeed not so convenient option. Also, there are many investors either not having a Demat account or not comfortable trading themselves on an exchange. At times, the brokerage account also charges high brokerage unlike discount or low-cost brokerages. These are the constraints faced while investing in a good ETF like JuniorBees.

Hence, comes the Reliance JuniorBees FoF. This FoF is a mutual fund allowing the investors to do SIPs and invest without trading knowledge and account. Also, there has been a favorable change in the taxation of such schemes. Earlier all the FoFs were treated as debt funds. But as per the recent change, if an FoF is investing at least 90% funds in all equity ETFs and these underlying equity ETFs are investing at least 90% funds in domestic equity, then it is treated as an equity-oriented fund. An equity-oriented fund will have the horizon of up to 1-year as short-term and LTCG tax will be applicable beyond Rs.1 lacs only. This makes the launching of such type of funds viable.

Now there is no free lunch in the markets. So, here also is the cost of comfort! This fund will charge fees on the top of underlying ETF expenses creating two layers of costs for direct fund investors. And Regular plan investors will pay ETF expenses, MF expenses and Distributor fees. This makes it effectively an expensive proposition. SEBI allows expense ratio of up to 2.5% for this category. Hence, the actual expense ratio once declared will be one of the most important factors for deciding in favor of or against this investment. Those comfortable in buying ETF using trading account must go for the direct purchase of JuniorBees in their accounts.

Like ICICI Pru and UTI MF, the AMC could also add an index fund in this case. This would have reduced the total cost of fund management. Moreover, if the ETF is not widely subscribed, it can trade below NAV. This is not the case for an index fund.

Well, but the fund house has for now chosen to offer this FoF adding AUM in both the schemes simultaneously. So choose your alternative prudently.

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