This time of the year we experience a lot of enthusiasm around us. The festive season is on and a lot of action around. The markets have rewarded the participants in October with a record 15% return on Sensex, though there was a high amount of volatility in the market.
The market is experiencing crazy valuations. Outperforming the markets has become a big challenge, though some say that simply buying the Reliance group stocks can easily outsmart the broad market. Well, it held good in the last year, and may not now. Moreover, this strategy has some coherent risks arising out of the concentration risks. Also at current valuations, there seems to be a limited upside.
In the last couple of years, it has been observed that the Indian markets are driven by foreign money. The foreign money finds it easy to enter into the index stocks as it addresses various issues, as these stocks are highly liquid and perfectly researched by the analyst community and hedging tools are also readily available. This not only ensures smooth entry but also a smooth exit from Indian capital markets.
The FII stomach for index stocks has culminated in the index offering one of the best investment options in the Indian equity market. In the context of relative returns, the performance of a money manager is judged by the extent of out-performance he has shown over the index. In the last couple of years, beating the index returns has become a task for most of the fund managers. There are many schemes that are under-performing the broad markets.
In such circumstances it makes a lot of sense to have a look at the index funds. Most of the fund houses offer index funds. The index funds represent passive investment strategy. They track specific index and try investing in same stocks in the same proportion as in the index. You must also note that the expenses are also low ultimately boosting returns.
The returns are impressive where the tracking error, the deviation in investment from the reality, is minimum and the scheme is a plain vanilla index fund. There are some index funds in the market where the fund manager can put a small component of the portfolio as per his discretion. However, experts prefer plain vanilla funds to such hybrid avatars of index funds.
You can also have a look at exchange-traded funds that track indices. In recent times exchange-traded funds have seen good appreciation in assets under management primarily due to a multi fold rise in assets of the banking sector ETF- Bank BeES. The rise in quantitative investing in Indian markets also has increased the appetite for exchange-traded funds. Quantitative investing is a systematic rule-based technique that is based on mathematical models, and is often back tested to check its performance. Globally, they are extremely popular and often form 15 to 25% of the mutual fund portfolio allocation.
Currently, Franklin Templeton AMC offers index-tracking equity linked saving schemes that feature amongst the list of schemes that have delivered handsome returns. Here the investors not only get the opportunity to ride the index but also to enjoy a tax break, though with a lock in.
Index funds can be a good vehicle if you are keen to take an equity plunge but not really comfortable taking high risks. In the gamut of equity funds, index funds are seen as the lowest risk option. A word of caution in the short term due to P- notes issues and other global factors pertaining to liquidity and valuations, the domestic indices may come under more pressure compared to the broad market. In the previous month, the index has soared at a massive speed and it is the time the markets are expected to shade excesses. As a result, in the short term, the index funds may not deliver as they have in the last year. However, in the long-run there is a high possibility that you will get your dues. The short-term weakness in the key indices should be seen as an opportunity to enter the market through index funds.