In mutual fund foray, Zerodha plans to emulate its broking playbook

The newest entrant to the Rs 46-trillion mutual fund (MF) space – Zerodha – plans to focus strictly on the low-cost passive segment and offer its products solely through the commission-free digital route, as it aims to replicate its broking success in the MF space.

"We will offer an array of exchange-traded funds (ETFs) and index funds that would help investors take varied exposures and build portfolios based on their financial needs and risk tolerance.

"Zerodha Fund House (FH) products will be exclusively distributed online and available as direct plans to engage directly with individual investors and consumers, taking advantage of the pronounced shift from physical to digital interactions," said Vishal Jain, chief executive officer, Zerodha FH.

By adhering to passive funds and the digital distribution channel, the company will save on costs, enabling it to offer products at lower price points.

Unlike in active fund management, passive funds do not require large-scale investments to acquire talent for research and fund management.

Moreover, the digital distribution strategy will allow it to go asset-light.

Opening and operating branches is one of the major expenses of fund houses.

Several fund houses have adopted the digital approach in recent years.

"Zerodha FH will draw on both shareholders' experience and expertise in developing digital-first platforms for the retail investor and focus on educating the consumer.

"The fund house will build on Zerodha and Smallcase's shared principles of simplicity and transparency while building its product suite," said Jain.

Zerodha MF, a joint venture between leading brokerage firm Zerodha and fintech platform Smallcase, received its MF licence last month.

Passive funds have seen a surge in investor interest in recent years, owing to the underperformance of active funds in certain categories, greater variety of offerings, and low costs.

The rising popularity has led to increasing competition in the space.

In the current financial year (FY24), several fund houses have sharply reduced the expense ratios of their passive funds -- especially of the most sought-after ETFs and index funds — the ones that track the Nifty50 and the Sensex.

Following the reduction in fees, such schemes are now available at an expense ratio of less than 0.05 per cent.