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Aarati Krishnan

INVESTORS in UTI Master Index Fund, the passive index fund tracking the BSE Sensex, may use the recent surge in the index to book profits and switch to a diversified equity fund with a good track record. For one, in the Indian context, quite a few actively managed equity funds have delivered a large out-performance of indices such as the Sensex and the Nifty over a five-year period.

Given that the indices do not fully capture the action in a large section of the market, actively managed funds can be expected to continue this outperformance for some time to come.

Second, switching out of an index fund at this juncture may also help an investor lock into the returns made over the past year. Since the BSE Sensex has appreciated around 25 per cent from its levels in September 2001, this may be a good time to book profits. Third, while the majority of active funds have underperformed the index in a bear market, most of them have outperformed it in a bull market.

Therefore, for investors who see upside potential in the equity market from current levels, active funds may be a better bet than index funds.

Suitability: Since index funds completely circumvent the risks of poor stock selection by the fund manager, they are suitable to conservative investors in equity. However, an investor would be ill-advised to hold a substantial portion of equity portfolio through an index fund. By doing so, an investor may have to forego the higher returns available from some of the actively managed funds.

Investors with a substantial portion of their equity portfolio invested in the Master Index Fund may switch. Others who already have exposures in actively managed funds may hold the fund as a diversification measure.

Performance: Reckoned from its launch, the UTI's Master Index Fund has a modest positive tracking error of 0.3 per cent. The fund has lost 11 per cent in value since launch, while the BSE Sensex has shed 11.3 per cent in value over the same period.

On a year-to-year basis, the UTI Master Index Fund has displayed a sharper divergence from the Sensex. In 1998, the first year of operation, the tracking error was at a reasonable 0.4 per cent (positive). But it trailed the Sensex by 0.9 per cent in 1999 and by a significant 1.6 per cent in 2000. In 2001, the fund had a positive tracking error of 1 per cent. Tracking error has been positive at 0.8 per cent till date, in 2002.

: The Master Index Fund was launched in June 1998. The open-ended fund passively mirrors the BSE Sensex. While it carries no entry load, the exit load is around 0.5 per cent, for exit within six months of investment.

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