Monday, May 28, 2018

May 2018

The new financial year started on a positive note for the mutual fund industry. Its assets under management reached an all-time high of Rs.23.25 lakh crore, thanks to net inflows of Rs.1.37 lakh crore, according to the latest AMFI data. The AUM rose 9% in April 2018, from Rs.21.36 lakh crore in March 2018. The growth is due to healthy inflows in liquid, income and equity funds. AMFI data shows that equity funds received inflows of Rs.10,700 crore in April 2018. If we include ELSS, balanced funds, and ETFs that track indices, the overall inflows in equity funds rose to Rs.15,000 crore in April 2018. The rise in the inflows of equity funds is mostly due to investments by retail investors through SIPs. Similarly, balanced funds recorded the second highest inflows in equity category in April 2018. These funds received inflows of Rs.3,500 crore. Inflows in ELSS and ETFs stood at Rs.447 crore and Rs.305 crore in April 2018, respectively. The assets of equity funds including ELSS, ETFs and balanced funds have also reached an all-time high at Rs.10.60 lakh crore. This is largely due to increased inflows in equity funds and mark to market gains. While the industry received inflows of Rs.16,000 crore in April 2018, BSE Sensex and Nifty 50 reached close to their previous highs last month. AMFI has started disclosing inflows and assets of arbitrage funds separately from this month. The industry has collected Rs.1,238 crore through arbitrage funds. Largely corporates/HNIs invest in arbitrage funds for tax purposes. This separate disclosure will help the mutual fund industry get a better picture on net inflows. Among debt funds, income and liquid funds received inflows of Rs.5,200 crore and Rs.1.16 lakh crore respectively, in April 2018 largely because of investments from corporates and institutions. Corporate and institutions generally redeem their investments at the end of a quarter from debt funds to pay advance tax.

The new financial year continued to see increase in folios. The mutual fund folios count went up by 8.39 lakh in April 2017, according to the latest SEBI data. At the same time, the AUM of the mutual funds industry rose to an all-time high of Rs.23.25 lakh crore. The industry has witnessed consistent increase in the number of folios especially equity funds due to upbeat investor sentiment due to attractive returns. As on April 2018, the total industry folio was at 7.21 crore, with more than 4.4 crore coming from equity. In addition, equity funds (excluding arbitrage) received inflows of Rs.10,700 crore in April 2018. Balanced funds continued the positive momentum by adding 1.07 lakh folios in April 2018 despite a fall in the net inflows to Rs.3500 crore in April 2018 from Rs.6,754 crore in March 2018. Another equity category, tax saving funds also witnessed increase in folios. The category added close to 26,530 lakh folios during the month to reach a total folio count of 1.04 lakh. Equity ETFs, a part of passive investment recorded a marginal decline in folios. The category lost 942 folios in April 2018. Equity ETFs however witnessed an inflow of Rs.2,297 crore last month. Debt funds barring income funds also saw good traction in growth in folios. The total count of income folios fell by nearly 40,000 to 95.4 lakh folios. Another category of fund, the fund of funds saw fall in folios. Folios in overseas fund of funds category dropped by 146 to 93,713.

AMFI data shows that the top 20 fund houses manage direct equity AUM of Rs.1.45 lakh crore as on April 2018. HDFC Mutual Fund has the highest share of direct equity AUM. The fund house manages Rs.23,900 crore of direct equity AUM as on April 2018, according to AMFI data. The direct equity AUM of the fund house has increased by over 61%, from Rs.14,900 crore in April 2017. A major portion of this direct equity assets has come from T30 cities. While retail direct equity AUM of HDFC Mutual Fund was Rs.6,200, direct equity AUM of HNIs and sponsors were Rs.13,200 crore and Rs.1,000 crore, respectively. ICICI Prudential Mutual Fund, the top fund house based on AUM, followed HDFC Mutual Fund in terms of direct equity AUM. The fund house managed direct equity AUM of Rs.21,700 crore in April 2018 compared to Rs.13,200 crore in April 2017, a growth of 64%. The direct retail and HNI equity AUM of the fund house was close to Rs.4,400 crore and Rs.9,700 crore, respectively. Aditya Birla Sun Life Mutual Fund was at the third spot. The direct equity AUM of the fund house has seen a rise of 74% or by Rs.6,780 crore to Rs.15,960 crore in April 2018. In percentage terms, L&T Mutual Fund witnessed the highest increase in direct equity AUM. The direct equity AUM of the fund house increased by 240% to Rs. 2,946.24 crore. Retail and HNI investors contributed Rs. 3,440 crore or 82% to the AUM. Among the top 20 funds, DHFL Pramerica MF was the only fund house to witness a decline in direct equity AUM. The direct equity AUM of the fund house has reduced from Rs.540 crore in April 2017 to Rs.517 crore in April 2018. This is due to reduced contribution in direct equity AUM from the sponsor of the fund house. The contribution by corporate sponsor in direct equity funds came down to Rs.5 crore in April 2018 from Rs.101 crore in April 2017. Overall, the top 20 fund houses have witnessed growth of 63% i.e. from Rs. 89,225.24 crore to Rs.1.45 lakh crore.

The AUM of individual investors in equity-oriented schemes was Rs.7.93 lakh crore in March 2018, up from Rs.5.35 lakh crore in March 2017. The proportion of individual AUM in equity-oriented schemes to the overall industry AUM has increased from 30% to 37% in FY 2017-18, according to AMFI data. The individual AUM of the equity-oriented schemes increased from Rs.5.35 lakh crore in March 2017 to Rs.7.93 lakh crore in March 2018. The healthy inflows in equity funds through SIPs and the lacklustre performance of other asset classes have increased the demand for equity funds among individual investors. AMFI data also shows that individual investors account for 85% of equity-oriented schemes. The mutual fund industry saw net inflows of Rs.2.61 lakh crore in equity funds including pure equity funds, balanced and ELSS in FY 2017-18. Also, the industry mopped up close to Rs.67,190 crore in FY 2017-18 through SIPs as against Rs.43,921 crore in FY 2016-17. The increase in equity folios also display growing investor interest in equity funds. The total folio count of equity funds including pure equity funds, ELSS and balanced funds went up by 1.5 crore, from 4.43 crore in March 2017 to 5.94 crore in March 2018. Overall, the total value of assets held by individual investors in mutual funds increased from Rs.8.53 lakh crore in March 2017 to Rs.11.66 lakh crore in March 2018, an increase of 37%. While both retail and HNIs primarily invest in equity schemes, institutional investors prefer to invest in liquid and debt funds. Institutional investors dominate liquid funds and debt funds by holding 81% and 68% of assets, respectively.

Investor awareness campaigns and strong participation from retail investors have taken the asset base of smaller towns up 38% from a year ago to Rs 4.27 lakh crore in FY18, according to data from Association of Mutual Funds in India. Currently, B15 towns account for nearly 19% of the total assets of the industry. Overall, the industry's AUM, comprising 42 players surged 26% to Rs 23.05 lakh crore in March 2018. Of the total AUM, 62% of the assets from B15 locations was invested in equity schemes, while 36% for top-15 cities or T15 was in to equities. About 10% of retail investors chose to invest directly, while 18.4% of HNI assets were invested directly. Besides, 40.7% of the assets of the mutual fund industry came directly. A large proportion of direct investments was in non-equity oriented schemes where institutional investors dominate.

Piquant Parade

The DSP Group has announced that they will buy out BlackRock’s 40% stake in DSP BlackRock Investment Managers. With this, DSP BlackRock MF will become DSP MF. However, the fund house has to wait for regulatory approvals. While the DSP Group has a track record of over 152 years and currently owns a 60% stake in the joint venture, BlackRock Inc., which currently owns a 40% stake in the JV, is the largest asset management company in the world. Prior to this, the DSP Group had a joint venture with Merrill Lynch Investment Managers in 1996 for its asset management business in India, DSP Merrill Lynch Asset Management (India). This business went on to become DSP BlackRock Investment Managers in 2008 (after BlackRock Inc. took over Merrill Lynch’s global asset management business in 2006).

Escorts Asset Management Ltd has been renamed as Quant Money Managers Ltd. with effect from February 28, 2018. Subsequently, the name of the trustee company has been changed to Quant Capital Trustee Ltd. from Escorts Investment Trust Ltd, effective April 13, 2018. Quant Money Managers Ltd is the investment manager to Escort Mutual Fund.

SEBI’s data on ‘Status of Mutual Fund Applications’ shows that Muthoot Finance, Frontline Capital Services and Karvy Stock Broking are awaiting approval from SEBI to launch their mutual fund business in India. While Muthoot Finance and Frontline Capital Services approached SEBI in March 2017 and July 2017 respectively, Karvy Stock Broking has been waiting to get in-principle approval from SEBI since seven years. It had applied for AMC licence in November 2011. Interestingly, all three companies have a mutual fund distribution arm. AMFI data shows that the wealth management arm of Frontline Capital Services and Karvy Stock Broking have assets under advisory (AUA) of Rs.616 crore and Rs.6,634 crore, respectively as on March 2017. The AUA details of Muthoot Finance are not available in the AMFI’s list of top 500 distributors. Muthoot Finance is a gold financing NBFC.

Yes Bank will start its mutual fund business by August 2018. In fact, the AMC is in the final stage of getting SEBI approval to launch its first mutual fund scheme. The company has identified senior leadership and technology architecture to commence operations within 3 months. CAMS will be the registrar and transfer agent for the fund house. Similar to other bank sponsored AMCs, Yes Bank will leverage its banking network to distribute its funds. The AMC will channelize the savings of retail, corporate and institutional investors in equity and debt capital markets by leveraging Yes Bank’s expertise. This will complement Yes Bank’s retail liabilities strategy and also allow the AMC to leverage the bank’s distribution network for customer acquisition and provide customers a seamless experience for their investments and savings solutions

Union Bank of India said Japan's Dai-ichi Life Holdings acquired 39.62% stake in Union Asset Management through investment in compulsorily convertible preference shares. Accordingly, Union Mutual Fund will now be co-sponsored by Union Bank of India and Dai-ichi Life. Dai-ichi has replaced Belgium-based KBC Participations Renta SA, which exited the venture by selling its 49% stake in erstwhile Union KBC Asset Management and Union KBC Trustee to Union Bank of India on Sep 20, 2017. Japan's Nippon owns a stake in Reliance Asset Management which is listed on the stock exchanges. Global players like Prudential and Franklin Templeton dominate the industry.

Regulatory Rigmarole

To encourage retail investors, especially in B30 cities, a few fund houses have reduced their minimum application size from Rs.5,000 to Rs.1,000 to make mutual funds more attractive. While Essel Finance Mutual Fund, the erstwhile Peerless Mutual Fund has been following this practice for quite some time, fund houses such as Aditya Birla Sun Life and DSP BlackRock have reduced their minimum application size from Rs.5,000 to Rs.1,000 to make it more affordable for retail investors. In fact, Aditya Birla Sun Life Mutual Fund reduced the minimum application amount to as little as Rs.500 in their flagship schemes such as Aditya Birla Sun Life Frontline Equity Fund and Aditya Birla Sun Life Equity Fund. SBI Mutual Fund is also planning to reduce their minimum application amount to Rs.1,000.

India is poised to be the fourth wealthiest country in the world with total wealth of $24,691 billion by 2027, says a report released by New World Wealth. The report states that India will be the fastest growing among top 10 countries, growing at a massive rate of 200% in 10 years. Currently, India is the sixth wealthiest country with a total wealth of $8,230 billion. Strong growth in financial services, IT, business process outsourcing, real estate, healthcare and media sectors will pave the way for India’s growth. A large number of entrepreneurs, good educational system and the widespread use of English will also boost India’s wealth. In the last 10 years, India was the second fastest growing economy among the top 10 countries, with a growth rate of 160% between 2007 and 2017. India is also the best performing wealth market in the past one year at 25% on the back of strong stock market gains. Total wealth refers to the private wealth held by all the individuals living in each country/city. It includes all their assets (property, cash, equities, business interests) less any liabilities. The report has excluded government funds. The other countries that will witness rapid increase in wealth are China (180%) and Australia (70%). It also mentions some of the major risks that these top 10 countries may face in the future. It includes rising pension obligations, religious tensions and public healthcare costs. New World Wealth is a global market research group, based in Johannesburg, South Africa. They specialise in ratings, surveys, country reports and wealth statistics.

It is vacation time again! Time for a short repose…The next blog that will appear on the last Monday of August, 2018, will update you on all the happenings in the Indian mutual fund industry in the intervening period.

Monday, May 21, 2018

May 2018

In the financial year 2017-18, new fund offers of open-ended equity schemes raised Rs.6,612 crore, according to AMFI data. The funds mobilised by new fund offers increased by 664% or Rs.5,747 crore in the last financial year. AMFI data shows that while the industry launched 12 open-ended equity funds last fiscal, seven open-ended schemes were launched in the preceding fiscal. Although the numbers look large, the total collection from NFOs is hardly 6% of the overall equity flows. Many fund houses launch new open-ended schemes to complete their products basket. However, not all new schemes have collected significant inflows. A lion’s share of these inflows has come to Axis Mutual Fund. Axis Mutual Fund launched two funds – Axis Dynamic Equity Fund and Axis Multicap Fund – last fiscal. While the fund house collected Rs.1,700 crore during NFO of Axis Dynamic Equity Fund, Axis Multicap Fund collected over Rs.2,000 crore.

New Fund Offers of various hues adorn the May 2018 NFONEST.

IDBI Banking and Financial Services Fund
Opens: May 14, 2018
Closes: May 28, 2018
IDBI Mutual Fund has launched IDBI Banking and Financial Services Fund, a scheme focused on BFSI sector. According to SEBI rules, the scheme will be required to invest 80-100% of its assets in the banking and financial services sector. It can invest the balance 0-20% in the stocks of other types of companies or in debt. The scheme will be benchmarked against the Nifty Financial Services Index which is dominated by the HDFC twins (HDFC and HDFC bank). These two companies accounted for about 47% of the index on 30th April 2018. They are followed by ICICI Bank, Kotak Mahindra, SBI and Axis Bank. The holdings show a heavy private sector bank tilt. The scheme will be managed by Uma Venkatraman who also manages IDBI India Top 100, IDBI Small Cap and IDBI Equity Savings Fund.

SBI Dual Advantage Fund – Series XXVIII
Opens: May 14, 2018
Closes: May 28, 2018
SBI Mutual Fund has launched the SBI Dual Advantage Fund-Series XXVIII, a close ended hybrid scheme. The investment objective of the scheme is to generate income by investing in a portfolio of fixed income securities maturing on or before the maturity of the scheme. The secondary objective is to generate capital appreciation by investing a portion of the scheme corpus in equity and equity related instruments. The scheme’s performance will be benchmarked against CRISIL Hybrid 85+15 - Conservative Index and its fund managers are Rajeev Radhakrishnan, and Ruchit Mehta.

Canara Robeco Dual Advantage Fund – Series 1
Opens: May 18, 2018
Closes: June 1, 2018
Canara Robeco Mutual Fund has launched the Canara Robeco Dual Advantage Fund Series 1, a close ended income scheme. The investment objective is to generate income/capital appreciation from a portfolio constituted of debt and money market instruments for regular returns and equity and equity-related instruments for capital appreciation. The scheme’s performance will be benchmarked against CRISIL Hybrid 85+15 - Conservative Index and its fund managers are Cheenu Gupta and Suman Prasad.

Sundaram Long Term Tax Advantage Fund – Series V to VI, Tata Balanced Advantage Fund, Essel Multi Cap Fund, UTI Equity Savings Fund, Sundaram Emerging Small Cap Series – V to VII, HDFC Next 50 ETF, Sundaram Money Market Fund, UTI Floater Fund, Franklin India Equity Savings Fund, Aditya Birla Sunlife Resurgent India Fund – Series 9 & 10, Sundaram Services Fund and SBI ETF Momentum are expected to be launched in the coming months.

Monday, May 14, 2018


May 2018

All the GEMs from the 2017 GEMGAZE have performed reasonably well through thick and thin and figure prominently in the 2018 GEMGAZE too. 

Reliance ETF Nifty BeES Gem

Incorporated in December 2001, Reliance ETF Nifty BeES (formerly known as Goldman Sacs Nifty ETF Fund) has an AUM of Rs 925 crore. The one-year return of the fund is 16.2% as against the category average return of 13.13%. The top five stocks constitute 35.79% of the assets of the fund. The top three sectors finance, energy, and technology constitute 63.73% of the assets of the fund. The expense ratio of the fund is 0.1% and the turnover ratio is 69%. The fund is benchmarked against the Nifty 50. The fund is efficiently managed by Mr. Payal Kaipunjal since May 2014.

ICICI Prudential Nifty Index Fund Gem

The Rs 328 crore ICICI Prudential Nifty Index Fund, incorporated in February 2002, has earned a one-year return of 14.8% slightly trailing the category average return of 13.13%. Top five holdings constitute 35.62% of the portfolio. 63.55% of the assets are invested in finance, energy and technology, the top three sectors. While the portfolio turnover ratio is 44%, the expense ratio is 0.92%. The fund is benchmarked against the Nifty 50 Total Return. The fund is managed by Kayzad Eghlim since August 2009.

Franklin India Index Fund Gem

Franklin India Index Fund, incorporated in August 2000, has an AUM of Rs 241 crore. Its one-year return is 14.42%, slightly higher than the category average return of 13.13%. Top five holdings constitute 35.59% of the portfolio. 63.37% of the assets are invested in finance, energy and technology, the top three sectors. The expense ratio of the fund is 1.09%. The fund is benchmarked against the Nifty 50. The fund is managed by Varun Sharma since November 2015.

HDFC Index Sensex Plus Fund Gem

HDFC Index Sensex Plus Fund is a fifteen-year old fund with an AUM of Rs 105 crore. Its one-year return is 14.04%, a tad better than the category average of 13.13%. Top five holdings constitute 37.51% of the portfolio. 61.41% of the assets are invested in finance, energy and technology, the top three sectors. The expense ratio of the fund as well as the turnover ratio is low at 1% and 26% respectively. The fund is benchmarked against the S&P BSE Sensex TRI. The fund has been managed by Krishan Kumar Daga since October 2015.
UTI Nifty Index Fund Gem

Incorporated in March 2000, UTI Nifty Index Fund has an AUM of Rs 862 crore. The one-year return of the fund is 15.95% trailing the category average of 13.13%. Top five holdings constitute 35.69% of the portfolio. 63.52% of the assets are invested in finance, energy and technology, the top three sectors. The portfolio turnover ratio is a moderate 17% and the expense ratio is very low at 0.2%. The fund is benchmarked against the Nifty 50 Total Return. The fund is managed by Kaushik Basu since July 2011.

Monday, May 07, 2018

May 2018
A passively managed fund simply identifies the stocks and their proportion in the market index and then they mirror the same in the portfolio. With 50 companies listed on the National Stock Exchange, its index, Nifty is the most popular index in India. Sensex, on the other hand, has 30 companies listed on the Bombay Stock Exchange on its index. These indices have pre-defined allocations for each of the stocks. When any of the stocks change in proportion, the portfolio is adjusted to reflect the changes. Index funds do not require active research on the investment opportunities to find out which stocks to buy and at what prices or when. Index funds simply require passive management of the funds so that they are invested in the pre-set portfolio. When there is a change in the market index, the fund should replicate these changes to reduce the tracking error. The success of index funds lies in minimizing the tracking error so that it reflects the market index as closely as it can.

Why are index funds so popular in the US?
Most investors in countries like the USA and Europe find index funds to be a great success. Research on investments in the US has shown that over a given period of time, a large number of actively managed funds usually fail to beat the market. This is because they have a far more efficient market than India. You may have come across the sales pitch of Warren Buffet and Benjamin Graham recommending Index funds. What is being told is true, but it does not make complete sense unless you realize that they are talking about the American markets. Index funds in USA track indices which contain almost 500 to 5,000 companies. In the American market, the cost associated with other funds usually eats into the returns of the investor. In addition to the high fee structure of the funds, active management of these funds is not as effective since most fund managers find it difficult to beat the market with consistency. But these are the reasons for the popularity of index funds in other markets which are far more efficient and well-managed than the two market indices in India.

What about index funds in India?
If you are investing in India, then you must concern yourself with the market in the country so that you can make judicious decisions regarding your investments. The diminished presence of index funds in India is solely because it does not provide adequate returns. The two market indices, Nifty and Sensex, have a very small number of companies on the index. And this is clearly not indicative of the actual Indian market which is broader and more diverse. So if a company has potential but it is not big enough to reach one of the indices then it will not be a part of the portfolio. Similarly, if a big company has most of its shareholding held by promoters then it will not be able to find itself in one of the two market indices which mean that your index funds will not be able to take advantage of such well-performing companies. On the other hand, a fund manager for actively managed funds will see this as an advantage and add it to the portfolio. Because other countries have a stronger and more robust market, index funds are seen as a profitable investment in such markets. The fact that these markets usually perform well and actively managed funds in such markets often fail to reach the benchmark makes index funds a sensible investment for such markets. So Warren Buffet and Benjamin Graham were talking wisely about investment in their country. But since the Indian market is yet to reach competence in certain parameters, actively managed funds usually beat the market and perform better. A wise investor will see adequate reason to stick to actively managed funds in the Indian market.

What makes index funds less popular in India?
Now that we have established that indexing works in a few markets only, there are a few reasons why it is shunned by most investors in India:

The absence of adequate diversification

While Sensex may be considered as a barometer of the Indian market, it is not an ideal guideline for investment. The problem lies in ample diversification to make sure that the index includes companies from different sectors of the Indian market. At this time, Sensex does not have sufficient diversification in such terms. Important sectors like shipping, aviation, textiles, and tourism have not been adequately explored by Sensex. By limiting the sectors, it limits the chance of the index to mirror the actual Indian market. Even when a sector is represented by the index, the selection of the companies from the sector may not always be the best investment. Usually, large companies with liquid stocks find their way to the list of Sensex or Nifty’s index. But a wise investor will identify the potential of a company’s future and use more than just one parameter to invest in the company.

Holding on to underperforming stocks until the last minute

Since index funds rely on the index it is mirroring for buying or selling the stocks, these funds will usually include stocks that may be underperforming for a substantial period of time, till the company is not dropped out by Nifty or Sensex’s list of companies. The two indices experience a number of fluctuations throughout the day and there is no surprise in a company being dropped from the list to add a new, better performing one to it. While the working of these two indices makes sense, the problem lies in the fact that an underperforming stock may take up part of the share of your investment till the time it is on the list. Unlike actively managed funds, you do not have the option to do away with such companies by removing them from your portfolio.

Does not require Insight or Foresight

One of the things that is often considered to be a benefit of index stocks is the fact that it does not require an investor to continuously gauge the market. But what may be a benefit in other more established markets is a flaw for the Indian market. This is because fund managers or individual investors have the ability to wisely look into the past records of the company and its future potential to figure whether it will be a prudent investment or not. This helps them beat the market and gain better returns. Index funds, on the other hand, are devised to mirror the market, so the reality is that they would not be able to over-perform or under-perform when it is mimicking the market index. Indian investors will not be able to find satisfactory returns from such funds because of the fact that they perform at par with the market. While a conservative investor may feel this is good, studies show that other funds in India usually perform better than index funds.


They Buy High but Sell Low

Every time a company is removed from the list of the market index that the index fund is mirroring, stocks for that company will have to be sold. Since a company is removed mainly when it is under-performing, this means that you will be selling the stocks at a relatively lower price. On the other hand, the company that may have been introduced to the list will usually be a high performer. To comply with the characteristic of index funds, stocks for the newly listed company will have to be bought, which are usually at a higher cost. For the Indian market, buying high and selling low seems irrational; especially when the gains are not as substantial as other funds. Matching the weight of the market index is more suitable for dynamic markets where indices are put together with more parameters in consideration.

Innovative Indices are absent from the Indian Market

The Indian market presents two very basic indices that can be mirrored by index funds. The absence of dynamically managed indices makes it difficult for index funds to do well in India. Most countries where investors swear by index funds usually have innovative indices that they can take advantage of. Even though we have indices within the stock exchange, these indices are not available for investing which limits the potential of index funds. The Indian market is brimming with investing opportunities beyond these indices and when invested judiciously, an investment in actively managed funds can lead to a substantial amount of returns.

With the equity benchmark indices Sensex and Nifty making record highs day after day, a few passive mutual funds in India have returned more than 40% for the past one year. Interestingly, these passive funds have low expense ratios too, which may help the investors to achieve better returns. Another important aspect to note about these funds is that they do not aim to beat their respective benchmarks, but look to mimic the underlying index. For example, ICICI Prudential Next 50 Index Fund’s investment objective says, “The investment objective of the Scheme is to invest in companies whose securities are included in Nifty Next 50 Index (the Index) and to endeavor to achieve the returns of the above index as closely as possible, though subject to tracking error. The Scheme will not seek to outperform the Nifty Next 50. The objective is that the performance of the NAV of the Scheme should closely track the performance of the Nifty Next 50 over the same period subject to tracking error.”

When to invest in index funds?
Invest in Index Funds if:

You do not want to risk your money to a fund manager

If you do not have any faith in fund managers then investing in index funds may be suitable for you. No investment is immune from risks. Keeping in mind that fund managers may end up making the wrong choices or forecasting the wrong trend, other funds have a higher level of risk than index funds which are meant to automatically mirror whatever the market does. So, sidestepping the fund manager assumes paramount importance.

You do not want to pay too much for the costs

Passively managed index funds do not require a person to actively monitor the markets and make decisions regarding the portfolio. This means that the cost of managing these funds is fairly lower than other funds. If you do not want to give away your returns in the form of costs then you will find this to be a good investment. But market analysts usually find that what other funds lose out on cost, they usually make up on returns.

You want a broad exposure to the market

Sensex and Nifty incorporate those companies that are doing well and have an excellent reputation in the market. So if you are looking for exposure in the market, especially in stocks that carry a large market value, then begin with Index funds.

Things to consider as an investor

a. Risk

Since index funds map an index, they are less prone to equity-related volatility and risks. Index funds are amazing options during a market rally to earn great returns. However, you need to switch to actively-managed funds during a slump. It is because index funds may lose higher value during a market downturn. It is always advisable to have a mix of actively-managed funds and index funds in your portfolio.

b. Return

Unlike actively-managed funds, Index funds track the performance of the underlying benchmark in a passive manner. These funds do not aim to beat the benchmark but to just replicate the performance of the index. However, many a times, the fund returns may not match that of the index on account of tracking error. There might be deviations from actual index returns. Before investing in an index fund, you need to shortlist a fund which has the minimum tracking error. The lower the number of errors, the better is going to be the performance of the fund.

c. Cost

Index funds usually have an expense ratio of 0.5% or even less. In comparison, actively-managed funds have an expense ratio of 1% to 2.5%. The reason for cost disparity is that the portfolio of the index funds is not passively managed and the need for the fund manager to formulate any investment strategy does not arise. The real differentiating factor between two index funds will be their expense ratio. The fund having a lower expense ratio will give marginally higher returns.


d. Investment Horizon

Index funds are basically suitable for individuals who have a long-term investment horizon. Usually, the fund experiences a lot of fluctuations during the short-run which averages out in the long-run of say more than 7 years in order to give returns in the range of 10%-12%. Those who choose index funds need to be prepared to stick around at least for the said period to enable the fund to realise its full potential.

e. Financial Goals

Index funds can be ideal for achieving long-term financial goals like wealth creation or retirement planning. Being a high risk-high return haven, these funds are capable of generating enough wealth which may help you to retire early and pursue your passion in life.

 f. Tax on Gains

When you redeem units of index funds, you earn capital gains. These capital gains are taxable in your hands. The rate of taxation depends on how long you stayed invested in index funds; such a period is called the holding period. Capital gains earned on the holding period of up to one year are called short-term capital gains (STCG). STCG are taxed at the rate of 15%. Conversely, capital gains made on holding period of more than 1 year are called long-term capital gains (LTCG).  Owing to recent changes in budget 2018, LTCG in excess of Rs 1 lakh will be taxed at 10% without the benefit of indexation. If you plan to have an index fund in your portfolio, it is best to have a broad based index fund - an index that captures a large part of the market, such as a CNX Nifty 500.  The Goldman Sachs CNX 500 is one such fund.  If you are a beginner in stock investing, an index fund is a good idea to start with. It gives you exposure to a diversified portfolio at a very low cost.

Time for passive investing in India…
If Indian equity markets have indeed become more efficient over the years, why is it that active mutual funds continue to do better than passive funds? Why are active funds preferred over passive funds? After all if markets are getting efficient, then information asymmetry is becoming lesser. The fund managers should know as much as entire markets and no advantage can be drawn from any analysis.  So far, index investing has not succeeded because the market was not heavily institutionalised and large chunks of companies were not owned by professional fund management. This is now changing. Another huge factor which points towards the impending rise of passive investing is rising costs. Fund management costs have now gone through the roof. Actively managed funds charge up to three percent of total assets. This is something that will now start impacting returns in a way that is noticeable to investors. The next factor is the size of the funds. Indian equity funds have been seasonal and small. A small fund can opportunistically try many investments in midcap and smallcap companies that can yield returns that have a big impact on the portfolio. This is not possible for large funds. The Indian equity fund universe is now dominated by big funds. There are now more than fifteen funds that have more than Rs 10,000 crores. Seven-eight funds are close to Rs 20,000 crore. Such funds have no choice but to be large cap funds. They are finding it hard to beat the index consistently. They have a compelling performance track record over a long period and they have beaten the indices by a big margin. However, going forward, because of their size, because of the expenses they charge, and because of the growing institutionalisation of the market, they will not find it easy to outperform. So does that mean that if you are starting an SIP for ten years, you should do so in an index fund? Well, the case is not that strong yet. Over the last five years, the top five actively managed funds would have earned you one and a half times more than a Nifty fund and that is a big difference. However, it is something that an investor should keep a watch on. At some point in the coming five years, there will likely be a time when it will make sense to stop your SIP in an actively managed fund and turn to an index fund. We are heading in that direction, slowly but surely. Active funds still rule, but passive investing has a future.