Why are Index Funds in India not as cheap as Vanguard's Index Funds and ETFs?

It doesn't make sense to compare the expenses of Indian Index Funds and ETFs with Vanguard's Index Funds and ETFs. Vanguard's S&P 500 fund has more AUM than the entire Indian mutual fund industry AUM.

Before we begin, Total Expense Ratio (TER) is the amount that investors pay to AMCs for the operative and administrative expenses of managing a mutual fund. If a mutual fund has total assets under management (AUM) of $₹10,000$ crores and an expense ratio of $1\%$, it charges $₹100$ crores as expenses in an year.

The difference between regular plans and direct plans of mutual funds is explained in the article linked below. In short, regular plans have an additional cost of distributor commission. This doesn't go to the AMC.

Why should I invest in Direct Plans instead of Regular Plans?

Vanguard's S&P 500 ETF shares class (VOO) has a TER of $0.03\%$ and an AUM of about 66 billion. For reference, the total AUM of the entire Indian mutual fund industry is $$$431$$ billion.

In contrast, Kotak Flexicap Fund, one of the largest equity funds in India, has an AUM of $₹34,115$ crores and a TER of $0.64\%$ which means that the AMC gets about $₹218$ crores every year. In terms of dollars, that's $$$29$$ million.

UTI Nifty Index Fund

The total AUM of UTI Nifty index fund was $₹1,324.24$ crores at the start of the FY20 and was $₹1,772.13$ crores at the end of FY20. Its expense ratio throughout the year was $0.1\%$. If we consider the average AUM throughout the year as $₹1,548$ crores, a TER of $0.1\%$ would've given UTI approximately $₹1.5$ crores as earnings from UTI Nifty index fund in the FY20.

The list of expenses borne by UTI Nifty index fund in FY20 are as follows

Expenses	₹ in lakhs
Management Fees	$0.91$
GST on Management Fees	$0.16$
Trusteeship Fees	$0.76$
Marketing & Distribution Expenses	$17.12$
Custodian Fees	$9.55$
Registrar Fees	$18.82$
Investor Education Expenses	$32.25$
Audit Fees	$0.63$
Other Operating Expenses	$87.83$
TOTAL EXPENSES	$₹ 168.03$

The total expenses borne by UTI for its UTI Nifty index fund in FY20 were $₹1.68$ crores. Even if our TER calculation was an approximation, we still don't expect UTI would've made any significant profit from this fund and let's not forget, this is not charity or a non-profit venture by UTI. Since UTI kept the same $0.1\%$ expense ratio for UTI Nifty index fund in the FY21, it would've probably suffered losses in FY21 as well. We'll know more once the annual report of scheme financials is published by UTI.

People might argue that UTI could've reduced their expenses by not spending as much on Marketing & Distribution or Investor Education but considering they don't have enough AUM or TER to make any profits whatsoever, would cutting back on Marketing expenses help UTI at this point? The longer the fund has meager AUM, the longer UTI would suffer losses here. We should also consider that UTI Nifty index fund was launched back in March 2000, more than 20 years ago. I'm not sure if UTI has made any profits on this fund whatsoever and yet we hear people complaining about the TER of this fund being high.

Motilal Oswal S&P 500 Index Fund

The total AUM of Motilal Oswal S&P 500 index fund as on 31st March 2021 was $₹1,088.31$ crores and its expense ratio has been $0.49\%$ since its launch on 28th April 2020. Assuming an average AUM of $₹504$ crores, MO would've been able to earn approximately $₹2.4$ crores from its S&P 500 index fund.

Unfortunately, the scheme financial documents of MO's S&P 500 fund aren't available yet. It should hopefully be published in the next few months so we can know more about the expense details of MO's S&P 500 index fund.

Vanguard S&P 500 Fund

The Vanguard S&P 500 Fund is actually a class of several different funds all collectively known as Vanguard S&P 500 Fund. The different classes are

Vanguard S&P 500 Share Classes	TER	AUM (as on FY 2020)
Vanguard 500 Index Fund Investor Shares (VFINX)	$0.14\%$	$$$4.6$$ billion
Vanguard S&P 500 ETF (VOO)	$0.03\%$	$$$220.6$$ billion
Vanguard 500 Index Fund Admiral Shares (VFIAX)	$0.04\%$	$$$399.6$$ billion
Vanguard 500 Index Institutional Select (VFFSX)	$0.01\%$	$$$106.7$$ billion

Each share class has different minimum investment amount requirements and other minor differences. Combined, these share classes have an AUM of 240$$ million in the year 2020. The actual amount is probably somewhat lesser since we haven't considered average AUM in this case.

The total expenses of Vanguard S&P 500 fund across all of its share classes was 50$$ million in profit.

It should be kept in mind that Vanguard itself is structured differently than most AMCs and the company is owned by the investors in its funds. It was founded by the father of index investing, Jack Bogle, who was a proponent of low cost index investing. It would be fair to say that we haven't had any AMCs similar to Vanguard or influential index investing pioneers in India yet.

Summary

We don't think it makes sense to compare the TER of Indian index funds to that of Vanguard's index funds and ETFs. The difference in scale is just too great. The index investing scene in India is at a nascent stage, to say the least, if we compare it with giants like Vanguard. We've seen that a 20 year old domestic index fund like UTI Nifty Index suffered losses in FY20. Considering an international index fund like MO's S&P 500 probably has to face additional expenses, $0.49\%$ may not be unreasonable. Of course, we'll know more once we have the annual report of MO's funds for FY21.

https://utimf.com/forms-and-downloads/

https://investor.vanguard.com/etf/profile/portfolio/voo

https://investor.vanguard.com/mutual-funds/profile/portfolio/vfiax

https://investor.vanguard.com/mutual-funds/profile/portfolio/vffsx

https://investor.vanguard.com/mutual-funds/profile/VFINX

https://personal.vanguard.com/funds/reports/q400.pdf