GEM GAZE - INDEX FUNDS

Gem Gaze

Index Funds

Riding the market wave…

Index funds track a particular market index ( primarily the Sensex or the Nifty in India) by purchasing all the stocks of that index in same proportions as they are in present in the index.

The largest index fund in India, Benchmark Bank BeES, was launched in May, 2004. It has the highest AUM (Rs 4253.40 crore)and the lowest expense ratio (0.48%). CNX bank Nifty is the Benchmark Index. With a 49.07 per cent return, Banking BeES has been the top return generator among the index funds in the one-year period ending March 4, 2008. Despite the highs, the fund has witnessed steep falls during market corrections. Being an ETF, it is listed on the NSE. Junior BeES (midcap index fund), Liquid BeES (liquid index fund), Nifty BeES (the first index fund) are all exclusive index funds from Benchmark. Benchmark Nifty BeES has the lowest tracking error of 0.12%.

Launched in February 2002, Prudential ICICI Index Fund is an open-ended index-linked growth scheme seeking to track the returns of the S&P CNX Nifty index through investment in a basket of stocks drawn from the constituents of the Nifty. The Fund has a corpus of Rs. 38.58 crores. The expense ratio is 1.25%. It has an entry load of 1%. The one-year return is 29.2% and the tracking error is 2.47%.

Launched in September 2002, Birla Index Fund is an equity index fund that aims to generate returns that are commensurate with the performance of the Nifty. The Fund has a corpus of Rs. 35.36 crores. The expense ratio is 1.49%. The one-year return is 28.55% and the tracking error is 1.93%.

Launched in September 2004, Can Robeco Nifty Index Fund is an index fund that aims to generate income/capital appreciation by investing in companies whose securities are included in the S & P CNX Nifty. The AUM of the fund is Rs. 7.48 crores. It has an entry load of 1%. The one-year return is 25.79%.

Franklin India Index Fund has BSE Sensex Plan and NSE Nifty Plan. BSE Sensex and S&P CNX Nifty are the underlying benchmarks. The AUM of the Sensex and Nifty plans are Rs.24.5 crores and Rs. 84.7 crores respectively. The one-year return of the Sensex and Nifty plans are 25.75% and 25.58% respectively. The tracking error of the Sensex and Nifty plans are 0.88% and 0.99% respectively.

Principal Index Fund is an open-ended index fund launched in June,1999 to invest principally in securities that comprise S&P CNX Nifty . Its AUM is Rs.19.22 crores. It has an entry load of 2.25% and an exit load of 1%. It has an expense ratio of 0.75%. The one-year return is 25.10% and the tracking error is 1.62%.

Launched in February 2000, UTI Index Equity Fund has S&P CNX Nifty as the benchmark index. The AUM is 95.47 crores. The entry load is 2.25%. Its one-year return is 24.84% and tracking error is 0.4%.

Tata Index Fund, launched in February 2003, has an AUM of Rs.9 crores. The entry load is 1% and expense ratio is 1.5%. The one-year return is 24.46% and tracking error is 2.04%.

LIC Index Fund, launched in November 2002, is an open ended index linked equity scheme seeking to provide capital growth by investing in index stocks. The AUM of the Sensex and Nifty plans are Rs 35.1 crores and 45.1 crores respectively.The entry load is 2.25% and the expense ratio is 2.37%. The one-year return of the Sensex and Nifty Plans are 21.36 and 22.76% respectively. Tracking error is the highest at 7- 12%.They have a high tracking error because they do not follow their investment pattern. As per their offer document, they are supposed to invest 90-100% in index stocks and they can keep about 5-10% cash to meet redemption pressures. But the average cash levels of each of these funds stand anywhere between 7-12%.

Launched in January 2004, ING Vysya Nifty Plus Fund is an open-ended equity scheme, which invests only in companies that are part of the S&P CNX Nifty Index. The ING Vysya Nifty Plus Fund allows investors to ride the wave of the index going up, by investing at least 70% in S&P CNX Nifty Index itself the remaining (upto 30%) is invested in Nifty stocks. The AUM of the fund is Rs. 10.9 crores. The entry load is 2.25% and exit load is 2.5%. It has the highest expense ratio of 2.5%. The fund has earned a one-year return of 22.24%.

Launched in December 2001, SBI Magnum Index Fund aims to invest in stocks comprising the S & P CNX Nifty index in the same proportion as in the index with the objective of achieving returns equivalent to the Total Returns Index of S & P CNX Nifty by minimizing the performance difference between the benchmark index and the scheme. The AUM of the fund is Rs24.28 crores. The entry load is1.25% and the expense ratio is 2.11%. Its one-year return is 22.09% and it has the second highest tracking error of 3 to 3.5%.

A lacuna?

The maturity of the Indian market certainly does not seem to be round the corner. Active funds continue to rule the roost as is evident from the paltry AUMs, high expense ratio (the average expense ratio is 0.3% in the US) and high tracking error (2% is considered optimum) of the index funds. Some of the older players — this set includes indigenous groups like JM and Sundaram as well as bank-promoted outfits like Standard Chartered MF and HSBC MF — have no index-based product in their stable. Is the Kotak Sensex ETF, currently open for subscription, any indicator of an attempt to initiate the filling of the lacuna? Only time will tell!