The Hindu Business Line : Index funds - yet to catch market fancy?

Did you miss out a lot by not investing in index funds last year? Did your vaulting ambition (read: an illogical desire to beat the broad market every year) lead you only to actively-managed funds, leaving no room for these passive products in your portfolio?

We are not pressing the point too hard... for, the answer is known to all. Just check out their latest asset sizes, and you may well be convinced that these funds are nobody's business, largely ignored by the mainstream. The situation actually prompts us to place before you - once again - a few interesting factoids about the index chasers.

As always, we will let statistics to bear us out. While the index specialists beat many categories of actively-managed funds in a convincing manner in the past 12 months, the one-year performance chart (considering January 11 as the cut-off date) places them at 37 per cent. In comparison, the average diversified fund gave 31 per cent.

It is difficult for active fund managers to substantially outperform the market year after year, experts point out. Index funds, they add, come handy for investors who are not comfortable with tall tales of regular out-performance. They also refer to the fact that index funds are a low-cost affair when compared to the others.

But let not mere statistics influence our minds. Instead, let us turn to the mutual funds industry, especially to voices you cannot afford to ignore. To begin with, here is what the head of a leading private-sector fund house (one that routinely occupies a slot within the first five) says about trend: "I am sure index funds will eventually find their place in the sun. The catch, at least at this moment, lies elsewhere. The market in India is on its way to greater levels of awareness and maturity. Some quarters are yet to fully appreciate the finer points about index-based investing".

How is this fund chief's own index product (which replicates the S&P CNX Nifty) placed? It had a few odd crores to manage at the end of November. Do not be surprised to know how small the size is... for most index fund, size is not a strong point!

SIPs scorecard

The point is that if you had started a one-year SIP (systematic investment plan) in this fund on December 30, 2005, the total allocation of Rs 12,000 would have been about Rs 14,480 on November 30, 2006. A three-year SIP started on December 31, 2003 (that is, Rs 36,000) could have given you roughly Rs 65,400 on the same date. And a SIP started at the very inception in February 2002 (Rs 59,000) could have resulted in a market value of Rs 1.51 lakh or so.

The one-year, three-year and since-inception returns are respectively 48.5 per cent, 45.4 per cent and 40.7 per cent. An investment of Rs 1,000 every month during the tenure of the SIPs has been assumed. The higher levels of returns came from a sharply appreciating market - a phenomenon witnessed in 2002, 2003 and 2005. On the whole, it has not been a bad deal for someone who took the SIP route.

The case that can be made out is simple: Index funds, which sadly constitute a fairly small portion of the overall pie, have a point or two in their favour. The market has to become more aware of their usefulness. Investors need to try them in addition to other classes of funds.

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

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