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Suresh Krishnamurthy

A fund passively investing in `A'-group stocks could be a welcome alternative. It would avoid the problems of administration that a BSE-200 fund would present and at the same time capture market returns better than a fund that tracks the Nifty or the Sensex.

PASSIVE investing is not popular in India. It is not hard to guess why. The available products — Sensex and Nifty index funds — are not representative of the market. They account for just about 25 per cent of the market's capitalisation. Their performance, too, is not impressive. They lag the broader market indices such as the CNX-500 by a sizeable margin.

It is in this backdrop that we need passive funds that invest in `A'-group stocks. They would do a much better job of tracking the market than Sensex and Nifty funds.

They may also be easier to administer than a BSE-200 index fund. Till such time BSE-200 Index funds become feasible, `A'-Group funds remain the alternative.

Why `A'-group: A fund that invests in BSE-200 would be attractive from an investor's perspective. This index accounts for about 80 per cent of the market capitalisation of BSE.

It also does better than Sensex when stock prices rise. Between September 2001 and now, Sensex has risen 100 per cent, while BSE-200 has risen 160 per cent. This is still lower than the gain of 260 per cent recorded by an actively managed fund such as HDFC Top 200.

Still, a BSE-200 index fund would be attractive since it may be difficult for all the funds to outperform this index. Now, almost all funds outperform Sensex and Nifty funds over a longer period.

A BSE-200 index fund is, however, not practically feasible. This is because there are a number of stocks in BSE-200 index that are not traded actively.

The costs of administering the fund would thus be quite large. The solution is, therefore, to invest passively in `A'-group stocks.

`A'-group stocks account for about 80 per cent of the trading volume at the BSE, where the average daily trading volume in `A'-group stocks is Rs 1,200-1500 crore.

If the activity in the NSE is also aggregated, turnover in these stocks may be in excess of Rs 3,000 crore.

Even though the Nifty stocks may account for 50-60 per cent of this volume, this level of activity may be enough to support index funds.

It is true that in a number of `A'-group stocks trading volumes on an average are less than 10,000 shares at the BSE. That is true of Nifty stocks as well.

Volumes in stocks such as ABB, Britannia, Glaxo, Indian Hotels, Sun Pharma, Tata Tea and VSNL, too, are lower. Fund managers have, however, administered index-based products without much difficulty. It may be possible to do this with `A'-group stocks too.

A group and BSE 200: There are significant differences between a portfolio of `A'-group stocks and a portfolio of BSE-200 stocks.

There are 30 stocks in BSE-200 that are not part of the `A' group. These are usually new listings such as PTC, Petronet LNG, Biocon, Matrix Labs, Divi's Labs and TV Today Network.

There are also 25 stocks in the `A' group that are not part of BSE-200. These include old-economy stocks such as BASF, Century Enka, GMDC, Maharashtra Seamless and TNPL.

The market capitalisation of the `A' group is less than that of BSE-200 by about Rs 26,000 crore.

Despite the lower market capitalisation, it still accounts for nearly 78 per cent of the market.

The `A' group emerges as a portfolio that has barred entry into high-growth stocks. This could affect performance over a longer term.

Over the past three years, however, it is clear that `A'-group stocks have outperformed the BSE-200. There are also less liquidity risks associated with `A'-group stocks.

Besides, it is only a matter of time before the stocks listed over the past couple of years make it to the `A' group.

Given these factors, a passive `A'-group fund appears feasible and could emerge as a good opportunity for investors seeking exposure to equity but wishing to limit their risks.

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