Index Funds Discussions

[TATrader]

INVEST IN INDEX FUNDS

Two of the most popular stock market indices we have are the BSE Sensex and the NSE Nifty. While the Sensex is made up of 30 stocks, the Nifty represents 50 stocks. Both these indices have been moving from one peak to another. One way to capitalize on their appreciation is to invest in an index mutual fund.

ABOUT INDEX FUNDS

Index funds invest in stocks that make up a particular index, which is intended to be tracked. This helps the investor earn returns linked to the movement of the index tracked.

Index funds mainly track/mirror either the BSE Sensex or the NSE Nifty since these indices normally represent the overall market movement.

FUNDS AVAILABLE

Presently there are about 7 Sensex-based index funds and about 11 Nifty-based index funds. In order to select a suitable fund, keep in mind the following criteria:

Corpus size

It is preferable to invest in a fund with a large corpus since significant redemptions at a given time will not affect the performance of the fund dramatically. Unfortunately, most index funds have modest corpus sizes. The largest corpus size among index funds as on 31 October 2005 is Rs 192.54 crore held by LIC MF Index Fund - Sensex Plan. Compared to some equity diversified funds, which hold corpus sizes exceeding Rs 1,000 crore, this is insignificant.

Mirroring the index

Most BSE Sensex-based index funds don’t exactly replicate the Sensex i.e. their investment in stocks representing the Sensex are not in the same percentage the stocks have weightage in the Sensex. For instance, although Infosys represents 11.78 per cent of the Sensex, none of the Sensex-based index funds hold exactly this percentage of their portfolio in Infosys (LIC MF Index Fund - Sensex Advantage Plan - Growth holds the least – 8.97 per cent while UTI Master Index Fund holds the maximum – 11.88 per cent). Due to this, returns generated by these funds highly vary from the Sensex movement. For instance, while the Sensex returned 9.39 per cent in three months ending 9 November, LIC Mutual Fund’s index Fund – Sensex Plan generated just 3.61 per cent in the same period. Again, while the Sensex returned 28.20 per cent for the 6-month period ending 9 November 2005, LIC Mutual Fund’s Index Fund – Sensex Plan gave a 22.67 per cent return in this period.

Index funds which track the NSE Nifty are better off. Most of them faithfully represent the Nifty with very little variance. Because of this, returns generated by them are very close to the Nifty performance. For instance, while the Nifty generated a return of 7.35 per cent in the three-month period ending 9 November, the highest variance was by the LIC MF Index Fund - Nifty Plan - Growth which generated a return of 3.57 per cent (less by 3.78 per cent) over the same period while the lowest variance was by Franklin India Index Fund - NSE Nifty Plan – Growth which generated a return of 7.42 per cent (more by 0.07 per cent).

Choosing the index

While it is important that the index fund mirrors the index tracked
as accurately as possible, it is also important to decide which index one would like to invest in. Movements of the Sensex and the Nifty indicate that the former is more volatile than the latter. For instance, when the market is on an upward trend, the Sensex offers better returns than the Nifty while when the market moves southward, the Sensex falls more than the Nifty.

INDEX-PLUS

A few index funds add the word ‘plus’ to their names to indicate that while most of the corpus will be invested in the index tracked, a small portion will be invested in scrips outside the index. For instance, the HDFC Index Fund - Sensex Plus Plan’s objective is to invest between 80 - 90 per cent of the corpus in the BSE Sensex 30 scrips and the balance in non-index scrips. This increases the variance between the index performance and the performance of the scheme. It also implies that you are giving a small portion of independence to the fund manager to beat the index.

FUNDS’ PERFORMANCE

Over a 1-year and 3-year period ending 9 November, the HDFC Index Fund – Sensex Plus Plan has offered the highest return of 43.61 per cent and 65.29 per cent respectively followed by UTI Master Index Fund with a return of 40.66 per cent and 61.13 per cent respectively. Over a 6-month period ending 9 November, Reliance Index Fund – Sensex Plan tops the charts with an absolute return of 31.29 per cent followed by Tata Index Fund – Nifty Plan at 30.09 per cent.

ENDNOTE

Based on the index one would like to invest in, it is preferable to opt for a fund with consistent performance over a longer period. Sharmila Ramnani, FinanceInsights

IN BRIEF

>> One way to take advantage of a rising stock market index is to invest in an index mutual fund.

>> Index funds either invest in stocks forming the BSE Sensex or the NSE Nifty.

>> The Sensex has proven to be more volatile than the Nifty.

>> Some index funds invest a major portion of the corpus in scrips forming an index and a small portion is invested in scrips outside the index.

>> While making your investment decision, choose a fund which has performed consistently.

Source: timesofindia.com

[ivanboesky]

Thanks for the post TATrader, but dont you think its better to invest in an Index ETF as compared to an Index Fund. The costs of buying an ETF are lower, and you dont have to enter or exit at the end of day NAV. You can buy intra-day and sell intra-day, so its provides a clear advantage over a index fund.
Any other opinions?

[TATrader]

Originally Posted by ivanboesky

Thanks for the post TATrader, but dont you think its better to invest in an Index ETF as compared to an Index Fund. The costs of buying an ETF are lower, and you dont have to enter or exit at the end of day NAV. You can buy intra-day and sell intra-day, so its provides a clear advantage over a index fund.
Any other opinions?

If you are a trader it would be beneficial to invest in ETF or trade the Nifty Futures. But for long term investors wanting to use SIP, Index funds would be a better option.

[ivanboesky]

Even for the long-term, you can buy the ETF and just sit with it... Same for an SIP. You can buy more units of the ETF every month/ quarter etc etc... The advantage lies in the lower costs of an ETF, as well as the opportunity to buy and sell intra-day which could bring in more than what you could with an Index fund, which you would enter/ exit only at end of day NAV.

[TATrader]

Oh yeah! and an excellent observation ivanboesky.

Why did I not think of it before!! Is Nifty Bees ETF (traded on the NSE) a good proxy for the Nifty?

[swingtrader]

Ivan,

Few weeks ago I had wondered if I could use the NIFTYBEES for position/swing trading but when I checked its bid-ask spread it was too wide. I have only checked it once so I am not sure if the wide spread is the norm. Do you have any idea about it? I really really miss the QQQs (Nasdaq 100 ETF) I was trading in the US.

--SwingTrader

[sureshk123]

I found that the 1 year performance of index funds is excellent and ranks among the top 30- 50 among the 390 odd funds in the market, but the 5 year performance is at the very bottom ie below the 90- 110 ranks amongs the 120 odd funds any body knows the reasons

[sarathc]

Originally Posted by swingtrader

Ivan,

Few weeks ago I had wondered if I could use the NIFTYBEES for position/swing trading but when I checked its bid-ask spread it was too wide. I have only checked it once so I am not sure if the wide spread is the norm. Do you have any idea about it? I really really miss the QQQs (Nasdaq 100 ETF) I was trading in the US.

--SwingTrader

I think the huge buy/sell spread in NiftyBeES is due to the lesser liquidity. Looks like ETF trading is yet to takeoff in Indian markets - probably it's just a matter of time, and we seem to be ahead of it now...

Just to get to the numbers, the average daily trading volume of NiftyBeES for the last one year (August 1st 2005 through August 31st 2006) is a measly 6340.14 . The lowest volume of just 26 was seen on April 29 2006; and the highest volume in that year remained 50,019 on 22nd May 06.

[ivanboesky]

The market maker for the ETF continuously provides bids and offers. The spread just reflects the funds transaction cost. So if someone wants to do volume, the market maker will keep providing liquidity.
Yes, ETFs still have a long long way to go in India, but people are slowly but surely moving out of Index Funds and into ETFs.

[sarathc]

Originally Posted by ivanboesky

The market maker for the ETF continuously provides bids and offers. The spread just reflects the funds transaction cost. So if someone wants to do volume, the market maker will keep providing liquidity.

Ivanboesky,

Do we have officially designated market makers on NSE for NiftyBeES? If there aren't any, the liquidity is dependent upon the number of traders punching orders into NSE with the real intent of trading (they themselves are the unofficial market makers) on the NiftyBeEs ETF. Given that a trade can take place only when there are matching orders, and that the number of interested traders in NiftyBeES is currently is less, the liquidity issue seems surfacing more often than not. Please feel free to correct me if I'm getting into a wrong track here...!

But yes, it's perhaps just a matter of time before the concept of ETFs becomes popular in India - then, volumes pour in automatically, in leaps and bounds.

Eagerly waiting for that day...