VR Logo

Indexing Makes Inroads

Ever since the stock market sank, we haven't a new fund. Now they have lined up Index funds, as it isn't embarrassing when they don't perform. Indeed, the investment case for Index funds has also strengthened.

Ever since the stock market went in a tailspin, fund managers have stopped launching new equity funds. Ofcourse, new equity funds may not be needed as most fund families manage few open-end equity fund anyway. And most equity fund investors of recent years reeling in losses and more importantly sharper loss than benchmarks, which they owe it to their manager's indiscipline, it will be tough for funds to face investors with a case for a new equity fund.

So in a year when equities have been on a continuous downslide, fund managers are launching Index funds. Of the 46 new funds launched in 2001, only 6 are equity funds and the rest debt funds. Of course this count excludes the 63 fixed maturity plans, the specialty bond funds floated in 2001. And of these six equity funds, four are index funds. Fund managers have a key advantage with an Index fund – it is not embarrassing when they don't perform.

This week SBI Mutual also launched Magnum Index Fund, the ninth Index tracker. The fund with a minimum investment of Rs 5000 it comes with an entry load of 1 per cent. The fund's initial issue closes on December 31 and it goes open-end on January 14.

Index fund passively track the benchmark index and invests in only those companies, which make up the index and the portfolio is weighted in the same proportion as in the benchmark index. Index funds are managed to mirror the performance of the benchmark index and do not attempt to outperform it. However, there might be instances of minor variances in the returns of the index fund vis-à-vis the benchmark index. Explained as tracking error, under-performance can arise due to the costs involved in managing an index fund. And higher the fund expenses, greater would be the divergence. And inflows and outflows into the fund are also disruptive, impacting the returns from the fund.

The key compromise as an index fund investor is that you give up on beating the market. And Index funds do well in an efficient market. As Indian stock market is still considered inefficient, an active fund manager is likely to beat the market till our markets gain efficiency.

Of course, the benefit of an Index fund is that you are assured of owning a well-diversified portfolio all the time. Managed equity funds are often not disciplined enough and give wild surprises with their big stock and sector bet. Moreover, with growing institutional participation, our markets will gain efficiency. And adding value for an managed fund management will only get tougher. With an index fund you will be assured of riding the market, if not beating it.

Fund Update: During the week, the market fell freely with a 118 points on the Sensex registering a 3.5 per cent fall. And the equity funds witnessed a steeper fall with an average 4.82 per cent decline during the week. The top losers were – Libra Taxshield (-12.06%), IL&FS eCOM Fund (-9.87%), Sun F&C Res. India Equity (-8.41%), Libra Leap (-8.24%) and Magnum Taxgain (-8.06%).