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Selecting Index Funds

Index funds are good investments if you don't have the time to track your investments…

I notice you advocate core and satellite approach in building mutual fund portfolio. I would like to know, where does HDFC Index Sensex Plus fit in? What fraction of investible amount should be invested in a good index fund? Also how does one select a good index fund?
- A. R. Roy

Index funds are passive investments as they replicate the index that they invest in and these are good investments, provided you do not have the time to track your investments and have a long-term investing time frame. A fund such as HDFC Index Sensex Plus falls in the large-cap category and can be the second core fund for investor. This particular fund invests 80 to 90 per cent of its assets in the companies that form the Sensex and between 10 and 20 per cent of the assets in the companies which are not included in the Sensex.

You should not consider allocation to index funds beyond 5-10 per cent, after all the purpose of investing is active management, which is best derived from actively managed diversified equity funds.

Selecting a good index should be based on the fund's ability to replicate the index and its expense. On both these counts you will find that the Exchange Traded Funds (ETFs) prove to be very efficient and should be looked into.

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