×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

Go for index funds that are traded on exchanges

Go for index funds that are traded on exchanges
Comment E-mail Print Share
First Published: Tue, Apr 28 2009. 09 32 PM IST

Updated: Tue, Apr 28 2009. 09 32 PM IST
Markets are up about 30% over the past six weeks.Will this stock rally last? Should you buy now?
One view says that post-election, the markets will crash. However, if the Congress manages a stable coalition, they will soar.
Some experts believe that this is a dead cat bounce—a bear market rally that will shatter soon. Others say that the great Indian 20-year bull run is now open. The chief of India’s markets regulator, however, cautions against irrational exuberance.
And yeah, you’re a regular guy with a job, family and 35 bills to pay per month. The kid needs the annual jab, mum’s doc visit is due, in-laws are coming in a week. And that bathroom flush is leaking again.
So, other than making an otherwise function-riven day a little worse, the rise in the market becomes just another headline swallowed with the tea. Gives a feeling of having missed the bus yet again.
So, do you ever find yourself saying: Shoot! The price of sugar has doubled, I should have got my sugar rush last month when it was cheaper. No? Then why are you wondering if you should have bought shares last month when the price was 30% lower?
Theoretically it makes sense—buy when the market is at its bottom. There are two problems with that. One, you got to know the bottom on the exact date it gets there. And more difficult, two, to have half-a-crore handy to dump into the market on that day. That is the sure shot way of getting rich.
Real life is less neat. We live with regular inflows and outflows of money and the investment decision is more of a running question than a one bullseye shoot.
Examining a former colleague’s portfolio over the weekend, I’m struck by two things. One, after 15 years of a job, his provident fund corpus is now sitting at Rs18 lakh. Two, the home mortgage EMIs (equated monthly instalments) that end in three years have built an asset worth almost a crore in current value.
Please notice that both are deductions from the pay cheque that are not monthly choices.
Is there any way we can use this bit of information to participate in the stock market?
I am assuming that we are all on the same page, which says that stocks have the potential to build wealth long-term. Knowing that, we teeter at the edge of the pool waiting for the water to be just right. The big decision about buying stocks is when to plunge in and what to buy.
Let’s put the when to buy question on the table and examine it. The former colleague has not invested a rupee in the markets, though he is a bull rather than a bear, simply because he waits to time the market.
Till two years back, markets were too high. Since the crash began, he’s been waiting for the bottom. All the while hoarding cash. And while he was stressing over when to begin investing, his money on autopilot was quietly building wealth. When to buy is irrelevant to the person looking for a regular investing schedule.
So, what to buy? Remember equity need not mean buying individual stocks, it means an equity exposure, or investing in some instrument that invests in stocks. Our ideal product is one that is a no-brainer, does not need active management and will work on its own, while we attend to our damaged waste disposal systems.
The only way to do this is to invest in a broad market index. Take the Bombay Stock Exchange’s benchmark index, the Sensex, for example. It’s an index made up of 30 stocks. At the end of each day, the price of these 30 stocks are averaged according to a formula and the final value becomes the index movement for that day. These 30 companies are chosen because, at the time of inclusion into the index, they were the biggest and most profitable, and led the industries they operate in.
In 1986, the year the Sensex was constituted, there were companies such as Bombay Burmah and Asian Cables in it; we don’t hear of them today.
In 1996, we had Premier Auto and Hindustan Motors; ditto. Today, less than one-third of the original 30 firms remain on the index, which has reflected the changeover of Indian gross domestic product towards services.
What this means for us is that, every now and then, inefficient companies are struck off the index and new ones are included. Now, if you could buy this index, you would at each point hold mostly the best companies of a country. Which is what index investing is about.
There are already 21 index funds on the Nifty (the bellwether index of the National Stock Exchange) and the Sensex. Apart from a low tracking error, what separates a good index fund from the rest is low costs. Indian index funds continue to charge up to 1.5% per year, very high compared with international costs of about 0.2%.
The cheapest option of indexing in India is through the exchange-traded fund (ETF) route. It is a mutual fund that lists on a stock market and you buy it online through your brokerage account.
The Nifty BeES, UTI Sunder and Kotak Sensex are the cheapest in the market with just 0.5% as annual expenses. Go for it.
Monika Halan is a certified financial planner and policy analyst in the area of financial literacy and intermediation. Your comments and personal finance queries are welcome at expenseaccount@livemint.com
Comment E-mail Print Share
First Published: Tue, Apr 28 2009. 09 32 PM IST