What are Index Funds?
Index Funds and Other ETF Flows Trend
During the first quarter of fiscal 2024, there were nine schemes that were launched in the index funds category. Cumulatively, 40 index funds t were launched in the first half of calendar-year 2023; of these, there were 31 fixed-income index funds and nine equity-based index funds. In the last quarter ended March 2023, passive index funds garnered Rs 26,269 crore, shows data analysed by Morningstar.
Who should opt for Index Funds?
“Globally passive index funds have been gaining favour with investors due to lower fees. In advanced countries, the majority of active funds underperform the index. This has resulted in more popularity for index funds. In India, the time is yet not right as the size of mutual funds as a percentage of total market capitalisation is still small, but it is an emerging trend,” said Bharat Phatak, Director, Scripbox.
” Index funds provide diversification benefits as investing money in proportion to that of an index across all stocks and sectors. One of the biggest advantages of investing in these funds is the low expense ratio, as fund managers just mimic the underlying benchmark and no research cost is involved to choose or identify the best scrips,” noted Palka Arora Chopra. Director, Master Capital Services.
“Index funds charge much lower expense ratios, i.e., 0.3%-1.5%, than actively managed mutual funds and provide returns in line with the underlying benchmark such as Nifty 50, Nifty 100 etc. Thus, it is a simple and cost-effective way for investors to generate wealth over the long term (8-10 years or more),” said Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth
While the market may undergo a few up-and-down cycles during this period,,imvestors must stay patient with their chosen funds to let the compounding have its full effect.
Since index mutual funds mimic their benchmark index, there is no significant difference in the performance of two funds tracking the same benchmark, except for the tracking error.
Should one time the market to opt for an index fund?
Index funds are best suited for risk-averse investors for long-term financial goals.
” With index funds it doesn’t matter if the fund has been around for long or who the fund manager is as long as tracking error is low. Focus on broad index categories like large, medium or small cap index and avoid thematic index funds unless you are an expert in the underlying theme. If you want to be a passive investor and want your wealth to compound over time with little interference, you can have your entire equity portion of your portfolio allocated to index funds,” said Gaurav Rastogi, Founder & CEO, Kuvera.in.
Investors can go with more than one index fund to diversify their portfolio. “For example, you can invest in a Nifty-50 and a Nifty Next 50 fund to get exposure to India’s top 100 listed companies,” said Kuklarni.
Which are the best ones currently?
Experts Business Standard spoke to named HDFC Index Fund, Nippon India Index, ICICI, TATA Nifty 50, SBI Nifty Index fund, Aditya Birla Sun Life Nifty 50 Index funds, Bandhan Nifty 50 Index Fund among other as the most popular ones.
“SBI Magnum Midcap fund, Mirae Asset MidCap fund, HDFC Midcap Opportunities fund are all in the top of the list in the mid-cao space. Similarly in the small cap space, Nippon India Smallcap fund, Kotak Smallcap fund, ICICI Pru Smallcap funds are top ones that may be considered. There are options like NIFTY Next 50, BSE Low Volatility index fund in addition to Sensex and NIFTY tracking Index funds,” said Dutta.
“Investors should go long on broader market indices like Nifty 250 smallcaps, BSE 500 midcaps. Although these sectors are volatile, the exposure is not limited to specific sectors. Here, we have sectors like Capital goods, FMCG and Chemicals which augurs well with India’s growth story. Credit growth offtake is going to coincide with the peak NIM effect. A look at the returns in the past year: Nifty 50 index (11.75%), Nifty 250 smallcap (26.85%) and BSE 500 midcaps (19.65%). We have witnessed these companies give improved revenues and EBITDA margins and positive management commentary. For an investor who is looking for passive returns and is sitting on cash, should allocate to index funds,” said Anchal Kansal, Research Analyst at Green Portfolio PMS.
“Define your goals such as funding a marriage or higher education, or buying housing etc. You must remember that a longer time horizon and your ability to stay invested despite ups and downs could promise more potential growth,” said Shetty.
Chopra explains this with an example: If your present age is 35 years. You can invest =100-35=65% in the equity market and the rest 35% in fixed-income instruments. There is no such specific formula or basis for % investment in active equity funds or passive (index) equity funds. For first-time investors or conservative-type investors- Index funds make a lot of sense as the majority of these funds invest in large-cap companies.
“For someone just starting the equity investment journey, with a horizon of 7-10 years, the best place to start would be a NIFTY index fund like HDFC Index -NIFTY 50 plan or ICICI Pru Nifty 50 Index fund, with 50% of the long term investable surplus and preferably with the SIP route. For a person having a larger portfolio with a 2-3 years’ experience in equity investments could allocate 10-15% of their equity investments into Midcap and Smallcap index funds,” said Dutta.
Any word of caution?
For SIPs, the higher volatility of categories like small caps and mid caps can potentially add to long term returns compared to index funds, explains Bhatnagar.