The Hindu Business Line : Intermediaries try to lure investors into index funds

Kolkata April 18 If you are a big-ticket mutual fund investor willing to take a call on the direction of the index, this is your chance to do so in style. Simply put in a largish amount in an index fund — these days, not all players are charging exit loads — and you could gain from a possible upside in the market.

Welcome to the world of fund distribution, where investment circles seem to be finally waking up to the merits of index products. This after a superlative year for funds that have done relatively well and moved ahead of their diversified counterparts quite convincingly.

The result is that at least financial planners are now rooting for such funds, telling clients that these need to be considered more seriously. Some intermediaries are specifically referring to the absence of exit loads for allocations exceeding a certain minimum.

At the core of their premise is the recent performance of passively managed products.

Better performance

In fact, compared to index funds, which have given an average 16 per cent for one year (as on April 17, 2007), actively-managed funds have provided a little over 7 per cent, according to figures circulated by Value Research.

For large clients, fund houses that are willing to let go exit loads include ICICI Prudential MF, which offers a Nifty tracker.

While it charges 0.5 per cent for purchases up to Rs 5 lakh (that is, if redemption is taken before one year), there is no such levy for allocations above Rs 5 lakh.

Such an arrangement works well for these investors, the risks notwithstanding, intermediaries point out. It prompts them to act, after having taken a view on the direction of the chosen index, they add.

"An index fund is a comparatively cheap and simple way of approaching the market," notes Ms Ashu Suyash, MD, Fidelity MF, adding that such a fund may well be ideal for a first-time investor. Incidentally, about 20 index products exist today.

Birla Index assets soar

Assets managed by Birla Index Fund, which recently declared a dividend, have vaulted in the past few months, making the fund arguably the only one in the category to register a 40-times-plus growth between December 31, 2006, and March 31, 2007.

The fund, which mirrors the Nifty, had Rs 880 crore under management at the end of the last quarter — a marked change from the Rs 18 crore it had on December 31 last year.

Birla Index, which has of late decided to do away with exit load, has posted 9.07 per cent for the one-year period ending March 31.

This has actually trailed the Nifty, which has given 12.31 per cent during this period.