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Our Bureau

Kolkata , Feb. 6

PRINCIPAL MF has worked out an index fund to track the CNX Bank Index.

The proposed Principal PNB Banking Index Fund, which by definition will invest in securities in the same proportion that constitute the underlying index, will try to provide returns that closely follow the total returns delivered by the concerned benchmark.

For investors, a key issue will be tracking error — the standard deviation of the difference between daily returns of the index and the scheme's NAV. The performance of CNX Bank Index will have a direct bearing on what the fund delivers, the offer document filed with SEBI has mentioned. The fund's advantages will include relatively low costs; thanks to passive management, costs related to management fees and execution of trades will remain low.

The CNX Bank Index now has 12 stocks from the banking sector traded on NSE. As on January 27, 2006, these include heavyweights such as SBI (25.18 per cent weightage), ICICI Bank (28.85 per cent), HDFC Bank (12.06 per cent), PNB (7.69 per cent) and Canara Bank (5.24 per cent).

According to India Index Services & Products (the joint venture between NSE and Crisil that maintains NSE indices), the Indian banking sector has been undergoing major changes. The reforms recently introduced include the enactment of the Securitization Act, establishment of asset reconstruction companies, initiatives on improving NPA recoveries and so on.

The average total traded value for the last six months of CNX Bank Index stocks is approximately 74 per cent of the traded value of the banking sector. Also, this average is roughly 10 per cent of the traded value of all stocks on NSE.

A number of triggers will be offered by the fund, it is pointed out. These will help investors save time for completing redemption or switch formalities on happening of a particular predetermined event.

A unit holder may opt for a trigger when the value of investment reaches or crosses a particular value, or when the NAV attains a particular level. Change in the value of units at least by certain percentage can also warrant the use of trigger.

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Principal MF plans bank index fund

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