What 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?
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.
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Topic: What are index funds in India