Skip to main content

Invest in Index fund or diversified equity fund?

 

 

Is it time to invest your money in index fund or should you go in for a diversified equity fund? Here are the pros and cons


   IF YOU have put your money in the S&P CNX Nifty Index 5 years ago, there is a 70% chance that you would have made more money than by investing in a large-cap fund. According to S&P CRISIL SPIVA report for the year ended December 2009, over 70% of large-cap funds underperformed the S&P CNX Nifty Index over a 5-year period. But at the same time, with the Sensex reaching near-18,000 level, market experts are calling it a stock picker's market rather than one for the index investor. So, what should you, as an equity investor, do? To know the way forward, you need to answer some of the following three questions.


Where do you come from?


The answer to this question can make your life simple. Investors prefer to choose between active or passive styles of investing depending on their needs. It has been observed in developed markets that institutional investors such as pension funds looking for asset exposure prefer to stick to passive investing by opting for index investments. These investors are willing to commit their money for a long term. Liquidity remains a key parameter in any investment decision of these investors, which is ably addressed by index investing.


   The second segment of investors that would like to opt for index investing is known as 'asset allocators'. Once done with their risk profiling and investment needs, they prefer to allocate their money to various asset classes and hold on to them for a long period resorting to asset rebalancing at regular intervals. Index funds are preferred vehicles for many asset allocators. The rest of the investors, typically looking for alpha — the excess returns over the returns offered by the broad market — can look at actively-managed funds.


What ideology do you subscribe to?


While investing in the market, there is a need to have a sound foundation of a theory you subscribe to. Efficient market hypothesis (EMH) is a celebrated and equally-criticised theory in markets. EMH maintains that the financial markets are information-efficient. The prices of traded assets already reflect all the available information, and keep changing to accommodate any new information.


   In other words, stocks always trade at a fair value and factor in all possible information available in the market. Hence, no investor can buy an undervalued stock or sell an overvalued stock. There is no scope for an investor to beat the market in the long run by earning excessive returns than the returns offered by the broad market.

Take Your Pick

What's Your Style?

Active investment refers to a portfolio management strategy where the manager or investor makes specific investments with a view to outperforming a given benchmark market index. A good example can be a diversified equity fund, where the fund manager tries to beat the benchmark, say BSE Sensex, in the long term. Active investment indicates high churn, higher costs and achievement of alpha - the excess returns over market.


Passive investment Passive investment strategy involves buying a basket of shares with a long-term hold. The basket of stocks bought typically is an actively-traded benchmark representing broad market or a sector. A good example can be investing in an index fund in which the fund manager buys shares of companies in the same proportion as they enjoy in the underlying index. Passive investment indicates low activity, low costs and nearly the same returns generated by the index or the underlying basket.

Factors To Look At While Choosing An Index Fund

Tracking error How much the index fund's returns have deviated from the underlying index, is termed as tracking error. Zero or lowest tracking error is a good indicator of a good index fund.


Expenses: Costs are low given the little activity required to mimic the index by the investment manager. Lower the costs, the better it is for index investors.

 


Popular posts from this blog

Mutual Fund Review: Taurus Tax Shield

    Taurus Tax Shield has seen a turnaround in performance since 2007, but still remains a volatile offering… The fund has seen a turnaround in its performance since 2007 and has delivered impressively during market rallies since then. The portfolio is also more diversified. It contained its downfall to an average level in 2008 but is still one of the most volatile offerings in this category. Bold investors can look at this fund.   Strategy The fund manager invests across the market capitalisation and sectors. The selection of stocks is made on the basis of long-term business prospects and value creation. Fund Insight Launched in March 1996, the fund was a laggard with just two annual outperformances. Concentrated stock bets and high exposure to mid and small caps led to it being hit harder during market downturns. The number of stocks in the portfolio never exceeded 20 and it was not rare to see the top 5 holdings account for around 60 per cent of the portfolio. After b...

Health insurance guide - Part I

Insurance, by definition, is morbid. What if I die suddenly? What if my home caught fire? What if I had to undergo expensive medical treatment? What if something that I thought happened only to others befell me? Insurers, who work with large samples, calculate the probability of such an event and, hence, the possibility of them having to pay out a sum of money to mitigate, to the extent possible, the effects of that disaster. However, the possibility of you undergoing some kind of expensive medical treatment during your lifetime is far more likely than you dying suddenly or your house burning down. Given that costs at private healthcare facilities, where you are most likely to land up, is high, and, doubling every four years 10 months or so, the rest of your money life could easily go out of whack if you had to incur such expenses. Just 12 per cent of India's population is covered with some sort of health insurance. Pared to the bone, for a comparatively small price, health insu...

AXIS Long Term Equity Fund - The Best Tax Saver Fund for 2016

  AXIS Long Term Equity Fund - Invest Online   History:   The open ended mutual fund was launched on December 21 in the year 2009. It is benchmarked against BSE 200 and managed by the fund manager JINESH GOPANI. Initially the scheme was called as Axis tax saver fund but later it was renamed as Axis long term equity fund with effect from September 2, 2011. Nature of investment: As far as asset allocation is concerned, 97.52% of the stocks are equity and 0.02% is debt based. The primary focus of the fund is to invest in diversified equity stocks that have higher growth potential. Total asset size of the fund is in the tune of 4,996 CRORE as of June 30, 2015. Performance: The performance of the fund for one year, 3 years and 5 years are 23.6%, 29.9% and 19.1 respectively which are far greater than 6.4%, 14% and 5.6% benchmark figures. It has also preformed fairly well against SBI magnum Tax Gain (G) and HDFC tax saver (G). The growth comparison is enumerated below;                        ...

IDFC Classic Equity Fund

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   IDFC Classic Equity Fund IDFC Classic Equity is a large-cap equity fund which currently has assets under management worth Rs. 158.52 crore. It was launched in August 2005. The fund is benchmarked against the BSE-200 Index. Performance YTD 1-Year 3-Year 5-Year Since Inception IDFC Classic Equity 0.93 26.61 6.30 1.01 11.65 BSE 200 1.52 17.31 6.00 1.99 12.98 All figures in % as on January 31, 2013; Returns above one-year in CAGR terms ...

10 year NSC launched, all set to give 8.7 per cent

Invest in Mutual Funds Online Download Mutual Fund Application Forms THE government introduced a 10-year National Savings Certificate ( NSC ), which will earn an interest rate of 8.7 per cent per annum. The notification for the launch of the new savings instrument, 10-year National Savings Certificate (IX-Issue), 2011, has been issued, an official statement said. The scheme will come into effect from December 1, it added. Investments in NSC will earn interest at the rate of 8.7 per cent compounded semi-annually, it said, adding that on an investment of Rs 100, the depositor will get Rs 234.35 on maturity of the NSC. There is no upper limit for investment in the certificate, it added. The new scheme will give better returns along with tax benefit to savers. At present, the maturity period of NSC is six years and it qualifies for tax relief for investment up to Rs 1,00,000 under Section 80C. The decision to raise the maturity period of NSC has been taken on the b...
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