The Hindu Business Line : HDFC Index Sensex Plus: Invest

Investors can consider HDFC Index Sensex Plus as a diversification option. The fund invests 80- 90 per cent of its portfolio in stocks that constitute the Sensex, in accordance with their weightages in the index, and the remaining portion in stocks outside the benchmark. Such a strategy combines the low-cost, relatively low-risk advantages of passive management with the higher return potential of active investing, making it a superior alternative to pure index funds. However, the degree of out-performance may not be substantial.

The fund's strategy varies from that of a pure index fund, which invests only in index stocks with strict adherence to the weightages of the stocks in the index. In closely tracking the benchmark, index funds attempt to mirror the returns of the index. As they are passively managed, they incur lower expenses than typical diversified funds, where the manager actively picks out stocks that he believes will deliver strong returns. In India, however, index funds have largely not fared as well as active funds over three- and five-year time-frames. One, the tracking error associated with index funds has been significant. Tracking error refers to the mismatch between index returns and that of the fund.

Secondly, and more significantly, indices in India have not been perfectly constructed, with some stocks and sectors having a disproportionately large allocation in the index. Active fund managers have beaten the index by a significant margin by staying away from poor performers in the index basket. They have also been able to significantly perk up returns by picking stocks outside the indices that belong to nascent, fast-growing sectors.

In this context, funds such as HDFC Sensex Plus have the mandate to pick stocks outside the Sensex that have the potential to outperform the index. If it picks the right stocks, it could offset the negative impact that tracking error may have on fund returns. It could also generate returns that are slightly ahead of the index. Currently, the fund holds about 10 per cent of its portfolio in stocks such as ABB and Sun Pharmaceuticals that do not belong in the Sensex.

This fund may be a good addition to the portfolio at a time when a narrow set of large-cap stocks, including index heavyweights such as Reliance and Infosys, is being fancied by foreign investors. This explains the better performance of index funds, as diversified funds rarely hold as much as 10 per cent of their portfolio in a single stock. HDFC Sensex Plus delivered a return of 19.5 per cent over the past year, matching the Sensex returns. Over the past three years, it has delivered an annualised return of 35 per cent, outperforming other index funds that averaged a return of 30 per cent.

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