Index Funds

An Index fund is nothing but a mutual fund which invests in a particular index and all the stocks that comprise that index in the same proportion that these stocks are in the Index. For example, some Indian Index Funds are HDFC INDEX FUND (NIFTY), HDFC INDEX (SENSEX), FT INDIA INDEX SENSEX etc.

So what is the advantage?

Advantages are two. One, since the index fund tracks the stocks in a particular index, the returns from these funds will be comparable to the index. Thus most index funds would at the least match the index. Secondly, the Index funds are passively managed funds, thus the administration cost incurred are far less as compared to other MF. Also these funds track the index stocks with minimum transactions, so the transaction cost incurred are reduced substantially, which all reflects in the NAV eventually.

Any disadvantages?

Yes. Though the index funds track the index stocks, these are not short of the risk involved with the type of asset the fund holds. Thus index funds do not mitigate market risks.

Index fund scenario in India as against that in the US.

In India, the index funds came in very late as compared to the US. Infact, when you compare with the US, the mutual fund industry started way too late in India.

The idea of Index funds in India is borrowed from the US, with the same objective to reduce administrative costs and also match the market returns, both at the same time.

The US index funds for example operate at expense ratios of 0.1 to 0.8 as against in India, the Indian Index funds have expense ratios of 1.0 to 2.1. Thus when compared to the US, we our Index funds have some catching up to do.

The Outlook

As mentioned earlier that Indian Index fund market is still in the nascent stage and way behind the performance of the US counterparts. But these funds are gaining popularity and with better expense ratios achieved YOY, there is no doubt that the outlook for index funds is positive, with merits attached to invest some portion of you investment fund in the Index funds.