Index fund vs. Diversified fund

[loke4300]

Hello,

they say [book on financial planning - cnbc/tv 18 publication] that index fund [let's skip ETF] are the best way to invest as compared to Diversified funds.

Reasons given are -
low cost as compared to diversified funds
no fund manager can consistently beat the index in the long run.

to test these claims, i went to valueresearchonline.com and checked the
category performance over various periods :

5 year period : Diversified funds have outperformed index.

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3 year period : Diversified funds have outperformed index.

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and year to date returns are also in favor of diversified funds.

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while many claim index fund is the best to be invested in, this continued out performance by diversified funds raises doubt on such claim.
note-the data is for the diversified funds category as a whole and not any particular fund manager/scheme.

this data suggests that Indian fund managers have consistently outperformed the index so far.

I am trying to decide on which route to take - index or diversified?

please suggest.

 

[milind]

I think the statement about index funds beating managed funds is true in US and some other developed markets. However, in India, a good number of managed funds perform better than indexes. I would stick to a set of good 4/5 star diversified funds.

One advantage of index fund is smaller holding period for zero exit load (most equity funds have it as 1 year)

-- Milind

 

[nikrod]

I think the statement about index funds beating managed funds is true in US and some other developed markets. However, in India, a good number of managed funds perform better than indexes. I would stick to a set of good 4/5 star diversified funds.

One advantage of index fund is smaller holding period for zero exit load (most equity funds have it as 1 year)

-- Milind

Yes Index funds beating Diversified funds is the case with Developed markets like US. From cost point of view wherein US markets have given around 10-12% returns for long term; The index fund charge of say 0.5% makes it 9.5-11.5%. Diversified funds with 2% expense ratio will have to clock more than 12-14% returns to make it outperform the index peers. That gets difficult to manage consistantly in an efficient market.

India on the other hand is a developing market and there is still lot of wind remaining in India growth story. So I would say Diversified funds will continue to outperform index funds for coming years. But India will eventually reach the stage where US is now.

 

[AW10]

loke4300, In my view, the basket called as equity diversified covers all kind of equity funds ranging from small cap, mid cap, large cap etc.

And most of the index funds are based on Large Cap indexes like sensex/nifty/banknifty.

So, I think, you are comparing apples with oranges.

I think, more realistic comparision will be to compare average performance of nifty-index funds with all other equity fund that uses nifty as benchmark.
Unfortunately, that data is not available so easily.

As mentioned by Nikrod, the delta in annual charge of 1.2% makes difference too.
At first glance Diversified fund return of 20.23 looks better then 19.11% return of index.

But if you take out the cost of 1.25% that u have paid for active fund mgrs, then there is hardly any difference.

Happy Investing.

 

[loke4300]

loke4300, In my view, the basket called as equity diversified covers all kind of equity funds ranging from small cap, mid cap, large cap etc.

And most of the index funds are based on Large Cap indexes like sensex/nifty/banknifty.

So, I think, you are comparing apples with oranges.

correct. It skipped my mind.

At first glance Diversified fund return of 20.23 looks better then 19.11% return of index.

But if you take out the cost of 1.25% that u have paid for active fund mgrs, then there is hardly any difference.

true. after deducting the cost, there isn't much of a difference.

thanks again.

 

[jrahul52]

i am new to the mutual fund market!If someone can please suggest me some good mutual funds from the house of ICICI,Reliance and Franklin Templetion..it would be great!
thank you.

 

[nikrod]

i am new to the mutual fund market!If someone can please suggest me some good mutual funds from the house of ICICI,Reliance and Franklin Templetion..it would be great!
thank you.

Hi jrahul,

Welcome to the forum.

Before suggesting funds we would like to know about your risk appetite (How much risk do you think you can take), investment horizon (Number of years you can stay invested without withdrawing your money) and risk tolerance (How much capital loss can you watch calmly without selling your funds).

Also it would be better if you start new thread for such questions or post in simillar threads. This thread's discussion topic was different. Anyways do post about above mentioned parameters and users here will be able to help you.

 

[jrahul52]

Hi jrahul,

Welcome to the forum.

Before suggesting funds we would like to know about your risk appetite (How much risk do you think you can take), investment horizon (Number of years you can stay invested without withdrawing your money) and risk tolerance (How much capital loss can you watch calmly without selling your funds).

Also it would be better if you start new thread for such questions or post in simillar threads. This thread's discussion topic was different. Anyways do post about above mentioned parameters and users here will be able to help you.

thanks for the support nikrod!
since i am new risk should be minimum..i have time and patience to learn this trade....my time period is 5 -8 years maximum!
i can take a capital loss of like 100-200 k's!

thanks again for the help!

 

[nikrod]

thanks for the support nikrod!
since i am new risk should be minimum..i have time and patience to learn this trade....my time period is 5 -8 years maximum!
i can take a capital loss of like 100-200 k's!

thanks again for the help!

What is the capital loss you can bear in percentage? Like 10% or 20%...

That would decide whether you should go for Equity funds, balanced funds or asset allocation funds.

 

[jrahul52]

What is the capital loss you can bear in percentage? Like 10% or 20%...

That would decide whether you should go for Equity funds, balanced funds or asset allocation funds.

i would say i can bear around 50%
u have any good funds in mind that some good companies like Kotak ,icici or reliance might have?