The Hindu Business Line : Give index funds some thought

Quantum Mutual Fund, that atom-sized outfit in the welter of large and not-so-large players that make up the asset management industry, has again come out strongly on the merits of saving on distribution fees. And that is a good thing too, for this point needs to be repeated on and off. For a fund that does not employ traditional means of distribution, it needs to drive it home even more forcefully.

The fund has pointed out that every time an investor writes a cheque (in favour of a `traditional distributor-sold' fund), chances are that a part of it goes into meeting marketing and distribution costs.

Assuming the cheque is for Rs 1 lakh and these costs account for Rs 5,000, the investor concerned buys Rs 20 lakh worth of funds over the years, she might be signing away Rs 1 lakh in distribution fees. That's a huge sum of money.

If you want to know a little more on the matter, turn to Quantum's equity product. At the end of last month, Quantum Long Term Equity Fund had allocations to software, banks, auto, power and pharma - sectors that made up nearly 50 per cent of its portfolio. The fund had 35 stocks (as on April 30), many of them large-cap names that figure in the leading indices.

What constrains the fund is its size. With just Rs 33 crore or so, you will agree that not a lot can be done. As mentioned earlier, the fund is atom-sized. (We are not comparing apples to apples here, but the last count had Reliance MF at Rs 50,000 crore). We now wonder why this should be so. Surely, there are plenty of investors who can at least think about the matter a bit more actively. Or, is there really a much larger issue involved?

Trading costs

To move over to another (but not entirely unrelated) subject, investors need to know more about trading costs and other elements that push up their overall costs. What they should also remember is that every time they put in money and pull out only to re-invest it somewhere else (assuming that this is quite unnecessary), they incur costs that are entirely avoidable.

This brings us to the subject of index funds, which are basically low-cost in nature. These try to replicate certain indices without attempting to outperform. Check out their recent performance, compare the numbers to those delivered by actively managed funds, to see if these merit more attention.

Index products, it is generally argued, deserve more consideration than what they get. We have a limited number of index funds in the country. A lot has been said on the kind of assets they manage. It is a well-known fact that the money they handle is far too insignificant.

Most funds are based on either the Nifty or the Sensex; the other indices are generally ignored. Lately, select fund houses have tried to bring in more variety. The case put up by Benchmark MF is now well known. However, a lot remains to be done. To begin with, there is need for more awareness insofar as index-based investing is concerned.

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

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