Skip to main content

Mutual Fund: Index Funds

One of the ways in which the investing preferences in India are radically different from many of the first-world markets is our lack of interest in index funds. In the US, nine per cent of the money invested in mutual funds is in index funds, in India, this number is less than half a per cent, or about Rs 2,700 crore.

However, among the investing community, index funds take a mindshare that is out of all proportion to their size. The reason is that the concept of index investing is important, and so is the availability of index funds as an option for investors. Index funds are mutual funds that aim to replicate the performance of a market index. Thus, an index fund that is based on the BSE Sensex should have exactly the same 30 companies’ stocks that the Sensex has in exactly the same proportion. Thus, investors who put their money in such a fund would find their money gaining and losing in exactly the same proportion as the BSE Sensex does.

In some senses, an index fund completely reverses the main logic of mutual funds. Funds managers are supposed to provide individual investors the professional investment management that the investors don’t have the expertise for. Instead, the logic of index funds says that the fund managers themselves don’t have this expertise either and therefore, investors should simply follow the markets.

Is this true? In India, this wasn’t true till about a year back but in recent months, the performance of a majority of mutual funds is falling rapidly behind the indices. Over the last six months, barely 10 per cent of the 193-odd diversified equity funds have beaten the Sensex. This could be an anomaly of the falling market, but one thing is certain, equity funds are not beating the indices in an overwhelming way that they used to earlier.

Unlike other mutual funds, an index fund is not an investment management service at all--it’s just a convenience that enables you to buy and sell all the stocks of an index in an easy and tax-efficient manner. Since index funds do not need to do any research, fund companies should be able to charge less from investors for running them. Indeed, SEBI limits fund companies to charging 1.5 per cent a year from index fund investors, instead of the 2.25 per cent that is permissible for other equity funds.

So that means that index funds are a great investment options, right? Well, not quite. I’ve been describing the properties of ideal index funds and talking about the performance of the indices themselves (and not of index funds). However, there’s a bizarre twist to this tale. The Indian mutual fund industry seems incapable of running index funds that can actually replicate the performance of the indices they are based on. Of the 25 or so index funds that exist in India, only about 10 had returns that differed from that of their index by more than a per cent over the last year.

In fact, some index funds have had substantial variations from their indices. For example, LIC Mutual Fund’s as well as HDFC Mutual Fund’s Sensex index funds lost around 13.1 and 12.3 per cent respectively over a period during which the Sensex lost 7.7 per cent. This can hardly be described as a competent implementation of the index fund concept. This is not to say that all index funds are like this. There are many that track the indices much better. However, this variability brings an unwelcome element of complexity to choosing an index fund. Index funds of a type called Exchange Traded Funds (ETFs) are more capable of tracking the indices accurately. These are traded like shares and have to be bought from a stock broker.

With time, I expect index investing to become more and more relevant to investors. I just hope there are a range of well-run index funds to choose from.

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Mutual Fund Review: HDFC Index Sensex Plus

  In terms of size, HDFC Index Sensex Plus may be one of the smallest offerings from the HDFC stable. But that has not dampened its show, which has beaten the Sensex by a mile in overall returns   HDFC Index Sensex Plus is a passively managed diversified equity scheme with Sensex as its benchmark index. The fund also invests a small proportion of its equity portfolio in non-Sensex scrips. The scheme cannot boast of an impressive size and is one of the smallest in the HDFC basket with assets under management (AUM) of less than 60 crore. PERFORMANCE: Being passively managed and portfolio aligned to that of the benchmark, the performance of the index fund is expected to follow that of the benchmark and in this respect, it has not disappointed investors. Since its launch in July 2002, the fund has outperformed Sensex in overall returns by good margins.    While every 1,000 invested in HDFC Index Sensex Plus in July 2002 is worth 6,130 now, a similar amount invested in Sensex then wo...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now