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What are index funds?

Index funds are those which invest in security market indices in the same securities and in the exact proportion. They are passively managed where the fund manager’s intervention is not allowed. There are two popular indices in India: BSE Sensex and NSE Nifty. Index funds are those which primarily track these funds.

“There can be three kinds of index funds — index ETFs that are traded in stock exchange, index mutual funds and those that map sectoral indices," said Srikanth Meenakshi, founder and COO, Fundsindia.com. Non-ETF index funds returned 0.95% in the past year and index ETFs returned 0.74%, as per data by Valuersearchonline.com.

Who is it for?

If you don’t want to take the risk of how a fund manager performs, then index funds might be right for you, says Neeraj Chauhan, CEO of The Financial Mall. However, it is better to seek help from a financial planner before investing if you’re unable to understand it. The total expense ratio (TER) for index funds is 1%, according to Securities and Exchange Board of India. “One who wants to invest in the broader market and wants more diversification and lower costs can look at index funds," said Meenakshi.

This appears lucrative, but there is a catch of lower returns. “Fund managers have handily beaten the indices with their acumen at times," said Meenakshi.

Performance

Nine index funds were launched in 2018 and three in 2019 till date. “Launching index funds will give AMCs the hope it will become popular," said Kumar. “Large cap index funds find it tough to beat the index as they are expensive. Even within the ceiling of 1%, TER large cap index funds are more expensive than index ETFs. For eg: India’s largest index ETF, SBI ETF Nifty 50 is running at an expense of 10 basis points," said Dhirendra Kumar, CEO, Valueresearchonline.com. DSP Equal Nifty 50 Fund-regular Plan, a large cap index fund, has an expense ratio of 0.9. “It’s a gradual movement," said N.S. Venkatesh, chief executive of AMFI.

Liquid funds registered negative inflows in March, May, September and December. Dwijendra Srivastava, chief investment officer-debt at Sundaram Asset Management Co said, “Institutional players go for redemptions on quarter endings and then re-invest later to show cash on their balance sheets."

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