- Date : 06/06/2019
- Read: 4 mins
What makes index funds a smarter choice for those looking to invest in a long-term mutual fund with limited risk exposure? With a bit more detail on Index funds
Index Funds, a category that mirrors the composition of benchmarks like Nifty and Sensex, had posted a 60% surge in the last financial year. This is in sharp contrast to the lukewarm performance of actively-managed schemes. Notably, the asset of Index Funds, excluding Exchange-Traded Funds, increased from Rs 3,773 crore to Rs 5,275 crore during the year ended March 2019.
These funds are not greatly dependent on fund managers as they invest in a fixed set of stocks based on key market gauges like Sensex and Nifty. Notably, during this period the multi-cap funds delivered a return of 4.05% while large-cap funds returned 7.28%, both below the Sensex and Nifty returns. The return for Nifty 50 was 11.1% while that of S&P BSE Sensex was 12.4%.
After the SEBI categorisation and rationalisation of mutual funds, the market is ripe for index mutual funds to build their share. It is a good option for individuals who want to keep it simple when it comes to investments. HNIs looking for long-term growth also see value in Index Funds.
Index Funds do have certain advantages over their peers, as financial planners point out. Being passively managed they are less costly than regular plans - if you compare basis points it is as low as 20 against the 150-225 basis points that regular plans charge. ETFs are cheaper than Index funds but they require maintenance of demat account and involve brokerage on every transaction.
Not surprisingly, fund houses have introduced passive investment products of late to cash in on the rise in prominence of index funds.
How does Index Funds work?
An Index Fund consists of stocks which are in the index it tracks. For example, if an Index Fund is based on Nifty, its shares will be the same shares that are part of the Nifty benchmark. The fund manager of an Index Fund decides which stock to buy or sell based on the composition of the underlying benchmark. Unlike an actively-managed fund, Index Funds don’t aim to exceed the benchmark but rather match it. The difference between the benchmark and the Index Fund in terms of the return is called tracking error and the aim of the fund manager of an Index Fund is to minimise the tracking error to the extent possible.
An Index Fund is best suited for which type of customers?
As explained, these funds put safety in the forefront, so it is ideal for the less adventurous investors or someone who is looking to park a portion of his or her fund in a long-term, low-risk scheme. People who like to invest for the long run and are not likely to track the performance on a daily basis can choose to invest in Index Funds.
Which are some of the best performing Index Funds in India?
Reliance Index Fund - Sensex Plan, LIC MF Index Fund Sensex, UTI Nifty Index Fund, Franklin India Index Fund Nifty Plan and SBI Nifty Index Fund were some of the best performers in the Index Fund category in the last financial year.
Why investing in Index Fund is a good idea?
Firstly, it is a diversified fund as the underlying benchmark picks up shares from different industries and segments. Secondly, Index funds are much less expensive than regular funds and easier to maintain than ETFs. Regular plans are dictated by the management style of the fund manager. Index Funds are however passively managed so the influence of the manager is mostly limited to reduction of tracking error and deciding the proportion of shares. All these reasons make it advantageous to own an Index Fund plan.