时间：2022-07-09 06:45:49
If you want to invest in equity mutual funds but are not confident about the abilities of fund managers, index funds can be a good option for you. Index funds are equity funds that replicate a particular equity index by investing in stocks that the index tracks. As each stock has different weightage in an index, the portfolio of an index fund is allocated in a way to mirror that of the index. For example, if Reliance Industries has a weightage of 10 per cent in an index, a fund based on the index would also allocate 10 per cent of its portfolio to the stock. The advantages of index funds include:
No Fund Manager Risk: This strategy of building an equity fund portfolio, called pas- sive fund management, nullifies the risks associated with a fund manager, be it the possibility of his quitting the fund or taking wrong investment calls. Krishnamurthy Vijayan, CEO, IDBI Mutual Fund, says index funds are independent of the competence of a fund manager, his longevity or his character. Jaya Prakash, Head, Products, Franklin Templeton Investments, says index funds are ideal for those who prefer to take only market risk and not fund manager risk.
Lesser Portfolio Churn: As the portfolio is based on a particular index, there is less churning. The investor saves on the brokerage and transaction cost.
Low Expense Ratio: The role of fund managers being limited, fund management charges are also lower in index funds, as a result of which the expense ratio is lower than that of actively managed funds. The average expense ratio of an actively-managed fund is 2 to 2.5 per cent, while it is one to 1.5 per cent in the case of index funds.
Traded on Exchanges: Usually, normal funds can be bought and sold only at the net asset value, or NAV, declared at the end of the day. But in case of index funds, one can buy and sell any time of the day at the price prevailing at that particular time. This way, one can get a price advantage not available in non-exchange traded funds.
Performance Comparison
However, index funds lag many actively managed funds in terms of returns. In the three-year period up to March 31, 2011, the returns from non-sectoral index funds were in the range of 3 to 12 per cent with only two – HDFC Index Sensex Plus and Nifty Junior BeES – of the 22 funds with more than three years of existence giving doubledigit returns. (See Top 10 Index Funds)
The difference in returns from the respective indices (also called tracking error) is due to fund management and trading cost, time-lag in collecting and allocating the money and, at times, holding high cash.
On the other hand, over 80 actively managed equity funds gave over 10 per cent annualised returns, with the highest being 23 per cent by ICICI Prudential Discovery Institutional during the aforesaid period. Yet, during the same period, 20 actively managed equity diversified funds also posted negative returns while not a single index funds did so. In fact, none of the index funds gave negative return in the one-year, threeyear and five-year period to March 31. This shows that though the upside is lower, index funds can also limit the losses caused by the fund managers’ wrong calls.
Most financial planners and mutual fund experts though believe that it will take some time for index funds to become popular in India as there is scope for actively managed funds to beat the benchmark indices consistently. “Returns from index funds are smaller compared to other diversified equity mutual funds, and investors generally avoid these. It has been proven that some random stocks could beat market returns,” says Joseph Thomas, Head, Investment Advisory& Financial Planning, Aditya Birla Money.
Sumeet Vaid, founder and CEO, Ffreedom Financial Planner, says Indian equity markets are less efficient than those in developed countries in terms of uniform flow of information about particular companies and stocks. “This offers opportunity to fund managers to find stocks that can beat the benchmark indices consistently,” he adds.
Index funds, despite their not giving very high returns, can be a good option for investors who want to invest in equities but are looking to minimise the risk involved in doing so.
Courtesy: Money Today