The Hindu Business Line : BSE takes a leaf out of US book on indexing

THE Bombay Stock Exchange is taking a leaf out of the Vanguard group's book on indexing. Its index cell has sought to familiarise index enthusiasts in India with the views recently placed by the group before the US House of Representatives.

What has come particularly handy for the BSE are comments by Mr John C. Bogle, considered by many as the father of indexing. The founder of Vanguard has made certain observations on `mutual fund industry practices and their effect on individual investors'. These practices relate to key issues such as costs, returns and availability of information.

Higher costs lead to lower returns on investment - a truism that finds support from Mr Bogle as well, who adds that it is "immediately" relevant in the case of money market funds, "promptly" in bond funds and "over time" in equity funds, irrespective of style and risk. "Over the past 20 years, costs have deprived the average equity fund investor of nearly one-half of the stock market's returns", it is observed.

Rising expense ratios and portfolio turnover has led to a doubling of the gap between returns from equity funds and that from the stock market. There is evidence to show that despite a major growth in assets under management and considerable economies of scale in fund operations, expense ratios have increased over the years.

The former chief executive of Vanguard, who has referred to what he says is "near-obliviousness" of investors to fund costs, has underlined the need for greater disclosure with respect to their impact. Including information relating to an investor's specific costs in his statements could be an important first step. Sensex funds: Investors' interest in index funds continues to be quite low in India, international trends notwithstanding. The situation is evident from the asset sizes commanded by the Sensex trackers.

According to information, UTI Master Index Fund leads the pack with an asset base of Rs 195 crore (end-August). However, the gap between UTI MIF and its next competitor, HDFC MF's Sensex Fund is huge.

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