I am new to Mutual Fund, and have a doubt.
At Zerodha Coin, for example if i see any mutual fund like: HDFC Mid-Cap Opportunities Fund
(Equity Based). There are various sectorial allocation. Like:
Now, lets say Financial Sector is in loss but IT sector in profit, does the fund manager change the allocation, and move the funds to a profit making sector? Or is the allocation always constant?
It is the type of the fund that determines whether the stocks forming part of such fund remains constant or if it can be altered.
There are 2 types of funds, Actively managed funds and Passively managed funds (index funds)
The fund managers enjoy flexibility, as they can at any time alter (buy/sell) the fund’s portfolio based on the prevailing market conditions.
So, if the fund manager of an active fund feels a particular sector or any of its stock is not performing well, he/she can remove such stocks and readjust the portfolio based on his research and analysis.
Here, the fund manager can’t choose the stocks forming part of such funds, and can only try and replicate the index. The stocks forming part of such funds will remain unchanged until the index is rebalanced.
The rebalancing of an index can be quarterly/semi-annually or any such period as determined by the exchange.
So, unlike an active fund, the fund manager of a passive fund can’t alter the stocks forming part of such funds based on the market conditions.
You can check the fund’s fact sheet or scheme document to know the type of fund.
Generally, all funds other than Index funds are actively managed funds.
Thank you for the beautiful and detailed explanation. Now that i understand and after reading your article did some more research and saw this:
So seems like, all the MFs in Coin under “Equity” are actively managed. Whether i choose, SmallCap, LargeCap, MultiCap etc.
Now, i read in Varsity that “Expense Ratio” is the charge, that we pay to Fund Manager for actively managing our funds. But then some of these have also have “0” expense ratio.
My point is: How come they are charging 0 expense ratio, but still managing our funds? Or do you think they might be not that active? Any clue?
(This was the link to the article: Difference Between Active Vs Passive Investing)
Not all, but yes, most of them are actively managed funds.
Even under equity category, u can see there are Index funds, which are passive funds.
There might be a handful of such passive funds with zero expense ratio.
Also, when a fund is newly launched, the expense ratio gets updated only after a month or two, so during such period the expense ratio of such funds might appear to be 0% which will later get updated , so this could also be a possibility for seeing funds with 0 expense ratio.
None of the active funds would ever have such low expense ratio, such low expense ratio funds are always passively managed funds (index).
Q: What is the lowest expense ratio in mutual funds?
Typically, the average rate of expense ratio is between 0.50% to 1.50%. However, the expense ratio of index funds or ETFs can be as low as 0.21% or zero in some cases.Q: What are zero expense ratio funds?
Zero expense ratio funds are those where no fee is charged to the investor to manage the funds. These are usually Index funds or ETFs as they don’t involve many expenses.
I can understand charging low expense ratio for passive funds, as it requires less rejigging/management, but i still don’t understand the logic behind running a fund that charges Zero expense.
PS: MFs can at any time alter (increase or decrease) the expense ratio, so it not a fixed %, it can change. What is 0% now can become 0.1% after a few months.
