The evidence is that the more mature the market, the more difficult it is to add value for funds. Index funds may not be relevant now. But you can surely avoid beig a laggard with a diversified portfolio.
25-Aug-2001 •Research Desk
Pioneer ITI is launching an Index Fund on August 27. An open-end fund it will have two plans which will replicate the portfolio with Nifty and BSE Sensex. This will take the number of pasive index trackers to seven. The five existing funds - UTI Master Index, UTI Nifty, Franklin India Index, Franklin India Index Tax and IDBI Principal Index (Nifty) together manage Rs. 565 crore as on July 31, 2001.
The minimum investment for both the plans is Rs 10,000. Both BSE Sensex plan and Nifty Plan offer a choice of growth and dividend options. The dividend option also offers reinvestment facility. The fund aims to keep the tracking error in the range of + 2% by keeping the expenses as minimum as possible and will consider investing in index derivatives to reduce impact costs.
The portfolio of an Index Fund is weighted in the same proportions as the components of a broad-based share index. The performance of a fund consisting of company shares weighted in this way will mirror that of the index, thus ensuring that an index fund will not perform worse (or better) than the market as a whole. Many investors, especially the believers of Efficient Market theory, have reason to favour index funds on the assumption that trying to beat the market averages over the long run is futile, and their investments in these funds will atleast keep up with the market. As these funds track stock market indices instead of attempting to choose stocks, which may outperform, they simply buy all the shares in a given index in the proportion of the index.
The evidence is that the more mature the market, the more difficult it is to add value. As in a mature market the information received by fund managers is largely the same for everybody. So without taking big sector or stock bets, most fund managers generally under-perform index. From this perspective, Index funds may not be relevant now. But with our markets gaining maturity with growing institutionalisation, it may soon become relevant.
An Index fund works as long as everybody else is analysing all the companies and the market is setting fair prices. As an Index fund does not know a company but simply buys it, irrespective of special situations. The markets are also coming to satisfy the other pre-requisite for an Index fund, which is sufficient liquidity. With our broad stock market's lacking depth, atleast the stocks in the leading indices i.e. Sensex (BSE-30) and Nifty (NSE-50) are very liquid. The launch of Index funds for domestic investors can well be a low cost way to get well-diversified stock-market exposure, with low cost. With emergence of a wide set of professional fund managers, the time of Index funds may just have arrived.
The key benefit of Indexing is that it is a simple and effective means to get a diversified stock portfolio, not proven yet but hopefully a low-cost fund management and you will be assured of not being a laggard. Ofcourse, at the cost of forgoing the opportunity to beat the market.
Fund Update: For the week ending August 25, 2001, the market gained 8.80 points (0.27%) on the Sensex and 11.11 points (0.72%) on BSE National Index. The top gainers were ING Growth Portfolio (+3.92%), Prudential ICICI Technology (3.47%), UTI Software (3.03%) and Alliance New Millenium (2.71%). The top losers were Alliance Basic Industries (-2.17%), Taurus Starshare (-1.27%), Magnum Contra (-1.17%), and GIC Growth Plus II (-0.99%).
