Equity index funds invest in stocks by typically replicating a benchmark equity index such as the S&P BSE Sensex, Nifty, etc. They buy all the stocks which are in the benchmark index in the same proportion or weight.
As the markets are very volatile, should I invest in index funds to be safe?
Equity index funds invest in stocks by typically replicating a benchmark equity index such as the S&P BSE Sensex, Nifty, etc. They buy all the stocks which are in the benchmark index in the same proportion or weight. The objective being to provide a passive exposure to the index without taking any active calls in terms of either stock exposures or weightages. This strategy varies from an actively managed equity fund wherein a fund manager actively manages the portfolio by buying or selling stocks which might vary from those held in the index. Index funds are also subject to equity market related volatility which may be higher or lower than that of an actively managed fund. This would depend on the strategy adopted by the fund manager, number of stocks in the portfolio among other factors, vis-à-vis the index. Since index funds are passively managed, the expense ratio tends to be lower than that of actively managed funds.
I have been investing Rs 10,000 in a large cap fund through SIP for one year. But the returns are not impressive. Should I reduce the amount and instead invest in another fund? —S Sriram
Typically, fund selection should be based on a number of parameters including long-term performance track record, experience of the investment team including the fund manager and whether their skills match the fund’s investment mandate, parent’s philosophy and investment processes adopted by the firm. When assessing the performance track record it is advisable to consider different time periods and market cycles. One could look at calendar year-wise abd trailing returns vis-à-vis its benchmark index and category peers over at least previous five years. A fund can be considered as a consistent performer if outperforms its benchmark and category over 70% to 80% of trailing periods and is placed in either of the top two quartiles vis-à-vis its peers. Most good / highly rated funds tend have one or two bad years when they underperform the benchmark and/or category. But if the fund meets the other criteria outlined above, it might be worthwhile continuing with the investment for another 12 to 18 months before deciding to exit or reduce one’s investment.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to fepersonal email@example.com