The Hindu Business Line : Active or passive schemes? Blending both may be the answer

If you swear by only actively managed funds, chances are you will not give a second thought to index funds, those passively-managed vehicles that seem to appeal only to the true believers.

The latter - one hopes theirs is a growing tribe - will tell you how index funds have done throughout history, no doubt quoting comparative figures that may, perhaps for a brief moment, make you question the ability of active management styles to deliver decent returns, consistently and year after year.

Whether you follow active managers or track passive indexers, you will probably realise the importance of constructing a portfolio based on a good blend of both styles. And if you are inclined more towards frontline, large-cap stocks, you will stick to funds that make these their investment universe.

Not that you will find too many options on the index side - the Indian scenario for index-based investing is still more or less restricted to funds that track either the Nifty or the Sensex.

Widened Index basket

There is a small, very small, group of funds that appeal to investors with their large-cap bias, ones that create their portfolios mainly from index constituents. We are referring to the likes of UTI MF's Index Select and HDFC MF's Index Sensex Plus. Here are funds that choose their stocks - most of them, that is - from the two major indices, leaving limited room for other (smaller-cap?) names.

HDFC Index Sensex Plus, for instance, puts in 80-90 per cent in Sensex companies, while 10-20 per cent is kept for others. Launched in July 2002, the fund has given about 40 per cent since inception. And, going by its investment philosophy, it has few peers in India.

The point to be noted here, however, may surprise you yet: The fund's asset base is as small as Rs 11 crore (as on August 31, according to Value Research). This, as investment circles will no doubt agree, is terrible. Clearly, there are not too many takers for such funds in India, even though the asset management company in question is backed by the mighty HDFC.

UTI Index Select, originally formed as a close-end product and made open-end in late 2000, has a slightly different approach. It invests 90 per cent or so in stocks that are drawn from the two indices. Its asset base is decidedly greater: Rs 296 crore at the end of August. It has posted about 22 per cent since its launch in 1997. Incidentally, the Sensex has 30 constituents and the Nifty has 50.

Is there a future for such funds in this country? Mind you, a small portion of non-index mid-caps may at times boost returns for a fund that is principally focused on the index scrips. Now, coming back to our question, the answer may be elusive for now, but any attempt to find it will have to factor in a few key trends.

One, the average equity fund investor has been significantly in favour of diversified growth funds that are actively managed.

Two, these have been outperforming their benchmark indices in recent years, thanks largely to the advancing stock market. Three, there is extremely low awareness of index funds in our market - a situation that fund houses and their distributors are not ignorant about.

While little is being done to change the situation for the better, this poor knowledge is getting reflected in the low asset bases of index funds.

Feedback may be sent to nilanjan@thehindu.co.in

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