Conventional wisdom says that it is foolish to invest in NFOs. Is this applicable to Index NFOs as well? As we all know, the fund manager does not play an 'active' role in index funds and the returns corresponds to the performance of the underlying index. I guess that rupee cost averaging theory does not hold in the case of Index funds. I am planning to make a lump sum investment in BENCHMARK S&P CNX 500 Fund. Please advice.
- Jojo Jacob
The main reason why we suggest investors to keep away from NFOs is that uncertainty is at its height in case of new funds. One does not buy into a portfolio when he invests in an NFO nor is there any history to judge its performance. On the other hand, in an established fund, we know where it invests and that the fund manager has shown the ability to manage the fund well in turbulent times.
But in case of index funds, the only unknown factor is the ability of the fund to replicate the index. Here, we buy into a portfolio that is known to us. So the theory of refraining from NFOs does not hold true for index funds.
Where investing in equity is concerned, SIP is always the best way to go about it. Index investing comprises investing in equity only and equity, as an asset class, is more volatile. So the best way is to buy an index fund and keep buying it regularly over time. Rupee cost averaging is all the more relevant here and so SIP is recommended for index investing also.