What are Index funds in India and why they are not popular?

What are Index funds in India and why they are not popularWhat are Index funds in India and why they are not popular?

Among the various types of mutual funds, one category of mutual fund which has not become popular is Index funds. What are index funds in India and why they have not become popular mutual fund investments?

What are index funds in India?

Index funds are mutual funds with an objective to generate returns that commensurate with the performance of a benchmark index. Only funds benchmarked to Nifty and BSE Sensex are considered.

Ideally there should be minimum expenses for such mutual funds as there is no research or high management overhead. The investment is done in the stocks of a benchmark index.

How should to choose best index funds in India?

Expense ratio: Since there is no research or higher management costs, the costs of index fund should be relatively low. E.g. for IDFC Index Nifty fund, the expense ratio is 0.25% and followed by Reliance Index Nifty fund at 0.40%.

Tracking error: If all the Index funds tracks the same index, then every index fund should offer the same return. Then our choice is to pick-up a low expense ratio. However you need to check the tracking error. The returns generated by an index fund may vary due to returns generated by underlying index. This deviation from index fund returns is called tracking error. Generally low tracking error funds are good.

Why Index funds in India have not become popular?

There are several types of mutual funds which are offering 10 to 15% annualized returns in the last few years. However returns in Index funds are ranging 4% to 8%.  Mutual funds schemes invest in best performing stocks, growing companies, for long term, hence the returns are higher compared to index funds.

Comparison of Index funds with other mutual funds

Index funds: The annualized returns across index funds in the last 3 years are between 4% to 8% (Average across this category is 4%)

Large cap mutual funds: The annualised returns in the last 3 years are upto 13% (Average across this category is 6%)

Diversified mutual funds: The annualised returns for diversified mutual funds in the last 3 years are upto 17% (Average across this category is 6%)

Then, when Index funds are good to invest?

  • Investors who want to take advantage of stock market crashes and want to invest directly in SENSEX or NIFTY.
  • Investors who want to invest in all stocks across index instead of investing in a few stocks or a mutual fund which picks up only based on its investment objective.
  • Investors who are willing to take risk as investment in index would reflect the stock market volatility

What are the top Index funds in India as of today?

Best Index Funds in India (Feb-2013)

Conclusion: Index funds in India have not been attracting the investors. Since there are better mutual fund categories which picks up the best stocks and provide better returns, these index funds have become less popular.

If you enjoyed this article, share the link in Facebook/Twitter. The links are provided below.

Suresh
Topic: What are index funds in India

Suresh KP

4 comments

  1. IN ITR-I FORM UNDER Sch TDS II IN THE TAX DEDUCTED YEAR COLUMN 2013 IS ONLY GETS RECORDED FOR THE ASS YEAR 2014-15. IN THAT CASE CAN WE LIMIT  THE INTERST EARNED ON FD'S TO THAT FY ONLY ANDSHOW THE INTEREST ON BANK FD'S EARNED DURING JAN-MARCH 2014 IN THE NEXT YEAR RETURNS ie ASS YEAR 2015-16.YOUR REPLY IS GRATEFULLY AWAITED 

    (SD) BABURAO N. SUNKAD MNo 9449644115

  2. Dear Sir,

    plz suggest that I have total income from salaryis 220000-Hra amount & saving 77360=142640 & fixed deposit interest  is 48000 .Will I have to fill the income tax return assessing year 2013-2014 

     

     

    With Regards

     

    Vipin

     

    1. Vipin, If you do not have taxable income you need not file tax. However tax filings would be useful if you go for housing loan or any other loans. You may spend few minutes, but it may be useful in future.

Leave a Reply

Your email address will not be published. Required fields are marked *