Index funds

POSTED BY vj-manutdfan ON November 23, 2011 2:28 pm COMMENTS (16)

Hi guys,
Sensex touched its one year lows.so is it advisable to invest in Index funds which track sensex.If so which is the best performing index fund tracking sensex.
Thanks and Regards,
Vj

16 replies on this article “Index funds”

  1. Ah – The brokerage costs! Yep – missed that.

  2. Ramesh says:

    When comparing the cost of index funds, in addition to the 0.5% annual expenses, you need to take into account the cost of buying and selling them (which are approx. 0.55-0.75% per transaction, currently). Plus, add the cost of brokerage accounts, in case you want to open an account just for the sake of ETFs.

    An index MF like Franklin Templeton Index funds cost 1% per annum, so that is a reasonable comparison.

  3. Vishal – It is a myth that Index Funds hold the most expensive stocks. Index funds are supposed to track market indices. Since Sensex and Nifty both contain only large caps (or rather, a stock has to be a large cap with sufficient volume to be in the index!), in general, Index funds are relatvely inexpensive that the other thousands of midcaps out there (and favoured by several MF schemes). In fact the maximum expense ration is Index fund is 0.5% and most large MF schemes have an expense ratio close to 2%. Thus Index funds beat the others by 1.5% just off the bat. So they are a good ‘addition’ to ones portfolio.

    When I mean expensive I mean the P/E ratios.Yes several index stocks cost in thousands, but that does not make them expensive because the firm value is higher to justify such prices. Put simply: Assuming Infosys P/E in year 2000 was 20 and share price (adjusted) was Rs.900. If the company is still showing prospects of growing high and the market is ready to pay a P/E of 20 and assuming the earning have gone up 3 times since 2000 the price will simultaneously go up 3 times to ~2700 as well. It is wise to put money in a stock at 2700 growing at 20% than putting money in a stock at Rs.40 and growing at 8%.

    1. justgrowmymoney – When I say expensive, I take into account the valuations of the stocks based on their earnings, book value, cash flows, dividends etc. Since these companies are in the index, they are largely amongst the most highly valued stocks in the country.

      And this index creation is all sham anyways. A bad stock becomes a part of the index (like Sensex) just because it has risen to a higher market value than a better stock, even if this rise is just out of speculation.

      So, when you buy an index, you are indirectly taking exposure to a lot of bad businesses, and just because they have a large market cap (think Reliance Power and Satyam earlier, or DLF now).

      Instead, one would do well to go with an actively managed diversified equity fund that has a proven process and a fund manager that has the capability to deliver across market cycles. Such funds do exist in India, and are any day better than the ‘dead’ index funds, especially if you are a long term investor.

  4. Dear Jig, We have both kinds of index funds in India. Working as ETF or like normal MFs.

    Please check the below link –

    http://www.economictimes.indiatimes.com/photo.cms?msid=10791860

    Regarding the taxation as the underlying asset is Eq. the long term returns are tax free.

    Thanks

    Ashal

  5. Kindly note that ‘index funds’ by nature hold the most expensive stocks in the stock markets.

    So the question is – Can holding an index fund really make you good returns over the long run when what you buy are expensive stocks?

    Instead, buying a well-managed equity fund could be a better choice.

  6. Jig says:

    What are the Tax implications for Index funds?( for NRI also)

    What are your thoughts about FT INDIA Dynamic PE Ratio Fund?

    1. Index funds are traded as ETFs in the STOCK exchange(s). Treatment is exactly like a stock (Short term/Long term returns).

  7. Dear vj-manutdfan, You may consider Goldman Sachs Nifty Bees or Quantum Eq. ETF. Both these are nifty based ETFs with lowest tracking error.

    thanks

    Ashal

  8. Index funds are some of the best investing instruments ever designed. Yes, active funds try to beat the market, but collectively, the Mutual Fund industry as WHOLE, globally, has underperformed the market, and this is not just in India. Agreed some funds like HDFC Top 200 have beat the market 15 out of 17 years in its existence but I am talking about the industry as a whole ~ 90+% funds underperform over any longer period.

    Buying Index funds is actually a sound investment [Detailed treatment in Benjamin Graham’s ‘The Intelligent Investor’]. Theoretically, If your portfolio is 80% Index funds and you fill up the 20% with carefully selected stocks you may yourself beat the market year-on-year. Isn’t all that mutual funds aspire to do?

    Index funds, in my personal opinion, must be the part of everyone’s portfolio and must be bought by SIP, month over month. Most of the GS/Bencmark ETFs have very low tracking error, a better place to start. [Dont go for Index funds that beat the market. They are then not really tracking the market:-)]

    1. vj-manutdfan says:

      Thanks a lot.I also thought the same

    2. vj-manutdfan says:

      Hi
      Can u please tell me which is the best performing index fund with good track record?
      Thanks in advance

  9. DP says:

    Moreover, as rightly suggested by Mr. Ashal and Mr. Manish, the fund manager aims to beat the return of respective index.

  10. Dear Vj-manutdfan, Your understanding is correct but please do remember, the other stocks as opted by fund manager in an active fund or even changed weightage of stocks than sensex may provide the kick in returns for which we invest in active funds.

    Investing in Index fund should be to strike out volatility in the performance of an active fund. You ‘ll get the return generated by the index adjusted for tracking error.

    Thanks

    Ashal

  11. vj-manutdfan says:

    Thanks a lot for the answer manish.My understanding is that index fund will invest in same proportion of the stocks(30 companies) the sensex is comprised of.since the sensex is down it means many stocks are available at a very good price.If i invest now in a fund which tracks sensex i can take advantage of this right? but in case of pure equity funds money is invested in stocks other than 30 stocks of sensex which i am not aware of.
    Please correct me if am wrong
    Thanks in advance

  12. VJ

    THis is not a reason for investing in INDEX FUND , the only reason you might want to do is that you want equity exposure and want less tracking . If you want to invest for long term because the markets are down , better go for pure equity funds or even mid cap funds depending on your aggresiveness

    Manish

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