What is the possibility of Navi mutual fund failing?
In what ways can it fail?
Do investors stand a chance of recovering their money in these cases( is there any insurance)?
I am not asking about loss of capital due to market problems. I am talking about cases like company running away with our money, going bankrupt, scams etc.
I am specially asking because they have the lowest expense ratio and are a new company.
I understand that not actively managed funds can get away with having low expense ratio a but I recently read an article on finshots saying mutual funds are finding it difficult to sustain with low expense ratios and high competition.
Mutual funds are well regulated and the securities are held with a custodian. They are also audited regularly, so in those respect it is relatively safe.
However, I personally don’t like NAVI as a company. They also have a lending portfolio where in they give loan personal loans and home loans. I’d much rather pay a few basis points higher but invest my money with a reputed fund house.
Mutual funds are constructed in such a way, that any mutual fund company will not go bankrupt like a bank. What can happen though, is that many investors can redeem their investment forcing the company to sell their quality holdings first and this can lead to stoppage of any new orders. In such a scenario, you will get back your money provided NAVI was able to sell their holding and you will receive back your money a little later.
Could you please elaborate on this sentence please. When I read the statement I felt that Banks goes bankrupt more often than Mutual Fund. If this is what you meant, it is not true.
I wouldn’t excessively focus on “Lowest” expense ratio for making investment decisions.
You have to remember that Expense ratios are not cast in stone and can be changed anytime MF wants.
Generally all MF houses are using low expense ratio as tool to garner AUM and once fund reaches sufficient / intended AUM, funds are hiking expense ratios.
So fund which has lowest expense ratio today may have high or highest ratio tomorrow and there is nothing investor can do about it.
Especially for passive fund, it would be worthwhile to check what is tracking error, rather than expense ratio. And to get a gauge of it need some performance time of fund.
So I would wait a year or 2 to see how much is tracking error Navi funds are generating and then take an investment decision.
In very simple terms, it is difference between return of underlying index and index fund.
So let us say in a year, Nifty50 index delivered 10% return and a Nifty50 index fund delivered 9.8% error, then tracking error would be 10 - 9.8 = 0.2%
Actual calculations are slightly complicated, but generally tracking error provides idea of how closely a index fund is following its underlying index.
While expense ratio is one of the factor affecting tracking error, there are many other factors in play too.
You can read more about it or google it
Thanks Akash. Can you please direct me to some resources about who calculates Nifty50, what is the criteria for getting included and removed from Nifty50. And what is the frequency of updation of this list?
What are the causes of tracking error? By intuition, I feel that:
During buying stock in bulk when it gets included in nifty50, dumping it when it gets discontinued,
human error
people withdrawing from the fund in large amounts so it has to sell some stocks to free up capital
Am I right? or are there some other factors altogether? How to know more about them?
Tracking the index stocks in exact weights is challenging and definitely contributes to tracking error. Expectations are fund need to deploy money as soon as they receive it in same composition as index, and some times it becomes difficult to execute.
But, there are other cause for tracking error too:
Holding of cash: Each fund needs to hold some part of AUM in Cash or equivalent to account for redemptions. This results in a drag.
