FundsIndia.com‘s financial advisory service is much sought after across investors in India and abroad for three important reasons – unbiased solutions to investor queries, a personalized approach with every individual investor, and most importantly, the precedence of expert-backed research over all answers and suggestions.
Yesterday, we received a very pertinent enquiry from one of our investors. We have shared this query and the answer given by our Head of Mutual Fund Research, Vidya Bala, as we believe it will benefit many investors who wish to make the most of their mutual fund investments. Please find the Q&A below:
Question:
I am thinking of investing in index funds (for example, HDFC Index – Sensex Plan). Over a period of time, I intend to completely move my assets currently in other mutual funds to one index fund. The reason behind this is that the past performance of index funds are comparable to good performing regular mutual funds, besides being comparatively cheaper. Index funds are extremely popular in US and many, including Benjamin Graham and Warren Buffet (in the book – The Intelligent Investor), advise passive investors to chose SIPs in index funds.
However, in India, I have not seen many articles/studies that show the performance of index funds vis-a-vis regular mutual funds (say a diversified fund). Your comments on my query will be extremely useful to make a judicious decision for me.
Response:
Thank you for writing to us. The reasons that make index funds popular in the US may not entirely hold good in India for the following reasons:
One, the Indian markets lack depth and are not as evolved as the US markets. Hence, there are plenty of opportunities outside of the index that an actively managed fund can tap, as the index does not capture the broad market too well.
Two, the tracking error (and therefore, expenses) in the Indian context is higher as a result of poorly constructed indices and the difficulty involved in tracking them.
Three, the choice of indices is mostly restricted to Nifty and Sensex here. We do not have the variety of indices that US offers.
Four, index funds work well if markets are efficient. Since all information that may affect a stock’s price is already factored in its price, you have very little scope to gain beyond that. However, in the Indian context, there is a larger group of stocks, especially in the mid and small-cap segment that see constant re-rating and price discoveries as information is not free flowing.
Five, the index stocks picked here have liquidity as a major consideration and therefore, some very fundamentally sound companies may be left out of the index for this reason.
The proof of this is reflected by way of performance of index funds in India when compared with actively managed funds. Over a 5-year period for instance, more than 2/3rds of diversified equity funds with a 5-year record comfortably beat the average return of index funds (19.5% compounded annually).
This does not mean that you should not go for index funds. A good index fund may form part of your core portfolio, along with a few active equity funds with a consistent record (than a flashy one) built around that, based on your requirement and risk appetite.
We have a call on HDFC Index-Sensex Plus Plan (not the same as Sensex Plan). You may view it by clicking here.
Wealth Conversations – April 2024- Temporary suspension of subscriptions in ” Mirae Asset Global Electric & Autonomous Vehicles ETFs Fund of Fund & Mirae Asset Global X Artificial Intelligence & Technology ETF Fund of Fund
- Merger Announcement: Aditya Birla Sun Life CRISIL IBX AAA Mar 2024 Index Fund
Here is everything that you need to know about Arbitrage Funds- Temporary suspension of subscriptions in “DSP US Treasury Fund of Fund”
One beats their own trump.! Learn to be modest and humble before you praise your own self Funds India.. No doubt your advice is “much” sought after but that should never come out from your own self.
Hello Mr. Kumar,
This blog post is a part of our ‘Investor Enquiry’ series, where we share pertinent financial queries with the general public. These questions have actually been asked by real investors to our investment advisors through our ‘Ask Advisor’ feature. We share it when we feel that the answer could be useful to a larger audience.
The purpose behind blog posts of this nature is two-fold: to encourage our investors to make prudent decisions when it comes to their investments, and to raise financial awareness among the general public. We share all those investor enquiries that we think will benefit our investors. Thanks!
H, on the same lines, I would also like to know about the scope of ETF’s in India. We dont seem to have many ETF’s, which in US is sort of a rage. Any reason why ETF’s are not so much promoted in India. Also do you see any improvement on this front i.e. would AMC’s bring out more range of ETF’s than just Gold ETF. We saw a huge demand for Gold ETF in last 2 years. Why is this opportunity being tapped by AMC’s.
Hello Gunjan, the response given to index funds is true of ETFs too. Also, while a number of AMCs have tried to file for innovative ETFs, SEBI has been discreet in allowing these products, given the lack fo depth in the market and poor constitution of many indices. In the US, the variety of indices and how dynamically they are managed is simply not comaprable. Besides, there are ETFs that are partly actively managed there! There are commodity ETFs there as commodity markets are evolved. But We still don’t have a silver ETF for instance. While this scenario will change, it may not happen soon enough. thanks, Vidya
Well written Vidya! I totally agree with all your points.
Regards
Seema
What is FundsIndia take on GS CNX 500?
Hello Prasad, sorry for the delay in response. CNX 500 is a good broad-based benchmark and covers 93% of marketcap, which is like having the entire market. In 2005-07, it was a tough benchmark to beat. But since the downturn, it appears to have lost its sheen as many debt laden companies were in it. While there are many actively managed diversified funds that beat the CNX 500, still, if you simply wish to mimic the market, this is a good index to hold. Vidya
Thank you Vidya madam for the reply.
I want to mimic the market for long term…30 years or so.
So I think this can be part of the core portfolio along with other active funds
Hello,
I am looking for simple annuities. are there such indexed/direct simple annuities available in India?
Thanks and regards
Sridhar
There are annuities plan available in insurance. Nothing that is indexed. They invest in debt.
Sir/ madam,
Pls advice to invest in below
DSP blackrock microcap fund
Sundaram rural india fund
ICICI PRU NEFTY NEXT 50 INDEX FUND
PRINCIPLE INDEX MlDCAP fund
For regular monthly investment
Thanks,
Dharmesh
78028 42746
Hello sir, you seem to have a high proportion of mid-cap funds in your portfolio. Note that these funds are high-risk and high-volatile. You also have a themed fund, and these are also high risk since themes come in and go out of play. You need to time your entry and exit and such funds are not generally suitable for monthly investments. For a detailed portfolio review, it requires details such as your timeframe and risk. If you’re a FundsIndia investor, please book an appointment with your advisor for a portfolio review. We’re constrained from providing fund and portfolio-specific advice in this forum.
Thanks,
Bhavana
Sir/ madam,
Pls advice to invest in below
DSP blackrock microcap fund
Sundaram rural india fund
ICICI PRU NEFTY NEXT 50 INDEX FUND
PRINCIPLE INDEX MlDCAP fund
For regular monthly investment
Thanks,
Dharmesh
78028 42746
Hello sir, you seem to have a high proportion of mid-cap funds in your portfolio. Note that these funds are high-risk and high-volatile. You also have a themed fund, and these are also high risk since themes come in and go out of play. You need to time your entry and exit and such funds are not generally suitable for monthly investments. For a detailed portfolio review, it requires details such as your timeframe and risk. If you’re a FundsIndia investor, please book an appointment with your advisor for a portfolio review. We’re constrained from providing fund and portfolio-specific advice in this forum.
Thanks,
Bhavana
One beats their own trump.! Learn to be modest and humble before you praise your own self Funds India.. No doubt your advice is “much” sought after but that should never come out from your own self.
Hello Mr. Kumar,
This blog post is a part of our ‘Investor Enquiry’ series, where we share pertinent financial queries with the general public. These questions have actually been asked by real investors to our investment advisors through our ‘Ask Advisor’ feature. We share it when we feel that the answer could be useful to a larger audience.
The purpose behind blog posts of this nature is two-fold: to encourage our investors to make prudent decisions when it comes to their investments, and to raise financial awareness among the general public. We share all those investor enquiries that we think will benefit our investors. Thanks!
Well written Vidya! I totally agree with all your points.
Regards
Seema
Thank you Vidya madam for the reply.
I want to mimic the market for long term…30 years or so.
So I think this can be part of the core portfolio along with other active funds
H, on the same lines, I would also like to know about the scope of ETF’s in India. We dont seem to have many ETF’s, which in US is sort of a rage. Any reason why ETF’s are not so much promoted in India. Also do you see any improvement on this front i.e. would AMC’s bring out more range of ETF’s than just Gold ETF. We saw a huge demand for Gold ETF in last 2 years. Why is this opportunity being tapped by AMC’s.
Hello Gunjan, the response given to index funds is true of ETFs too. Also, while a number of AMCs have tried to file for innovative ETFs, SEBI has been discreet in allowing these products, given the lack fo depth in the market and poor constitution of many indices. In the US, the variety of indices and how dynamically they are managed is simply not comaprable. Besides, there are ETFs that are partly actively managed there! There are commodity ETFs there as commodity markets are evolved. But We still don’t have a silver ETF for instance. While this scenario will change, it may not happen soon enough. thanks, Vidya
What is FundsIndia take on GS CNX 500?
Hello Prasad, sorry for the delay in response. CNX 500 is a good broad-based benchmark and covers 93% of marketcap, which is like having the entire market. In 2005-07, it was a tough benchmark to beat. But since the downturn, it appears to have lost its sheen as many debt laden companies were in it. While there are many actively managed diversified funds that beat the CNX 500, still, if you simply wish to mimic the market, this is a good index to hold. Vidya
Hello,
I am looking for simple annuities. are there such indexed/direct simple annuities available in India?
Thanks and regards
Sridhar
There are annuities plan available in insurance. Nothing that is indexed. They invest in debt.