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 dont 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 Funds 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 Funds 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 Plans 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
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 dont 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 Funds 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 Funds 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 Plans 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