Mutual funds have to benchmark their returns against the total return index by including dividends received by fund house while comparing performance.
Mutual fund investment: With the kind of volatility being witnessed in the stock market in recent past, a lot of mutual fund investors, especially new ones, are getting perturbed after looking at their portfolio returns. Markets are inherently volatile and unpredictable in nature. For a new investor and even for those who are regular investors, index funds present a relatively less volatile way to invest in equity markets. Returns from index funds are more or less equal to market returns. Index funds basically reflect index movements as they are passive funds with no fund manager to actively take investing calls. If an index fund tracks Sensex, the returns are largely in-line with the returns generated by Sensex. Similarly for index funds mirroring Nifty index as its benchmark.
Axis Mutual Fund has launched an index fund – ‘Axis Nifty 100 Index Fund’, an open-ended index fund tracking the Nifty 100 Index. According to Axis Mutual Fund, Nifty 100 is a broader index as compared to the more popular Nifty 50 and has outperformed the NIFTY 50 Index in 8 out of the last 10 financial years.
The new fund offer (NFO) is open for subscription from September 27, 2019, till October 11, 2019. One can invest in the fund as a lump-sum or on SIP, STP mode. The fund will have a passive investing strategy and will replicate the Nifty 100 Index by investing in a basket of NIFTY 100 Index stocks in the same proportion as their weight in the index. In other words, the returns generated by the fund will be largely in line with that of the index it tracks, subject to the tracking error.
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In the recent past, index funds have gained more prominence than before. Sebi, the market regulator, has asked mutual funds to stick to their mandate and, therefore, the practice of large-cap funds generating returns by investing in mid-caps will cease to exist. Further, mutual funds have been asked to benchmark their returns against the total return index (TRI) by including dividends received by fund house from companies while comparing performance.
There are several index funds in the industry and each one is benchmarked to a different index. For a new mutual fund investor, an index fund can be a nice starting point. It helps one to get familiar with the ups and downs of the market indices and over-time may consider other actively managed funds.