Picking winning funds is like hunting for a needle in a haystack. So instead invest in
Benchmark Mutual Fund has launched the S&P CNX 500 Fund, an open-ended index scheme. The fund house focuses exclusively on index funds and exchange traded funds (and has no actively managed funds). Index funds mimic their benchmark index. The investment objective of this fund is to generate capital appreciation by investing in securities that constitute the S&P CNX 500 index in the same proportion as in the index. About 90-100 per cent of the investment will be in securities constituting the S&P CNX 500 and 0-10 per cent in money market instruments and bonds.
Why invest
Many financial planners support the idea of investing in an index fund to avoid the vagaries of investing in an actively managed fund: fund manager?s investment approach may not work after a time, he may shift to another fund, high fees, and so on. According to Veer Sardesai, a Pune-based financial planner, ?Based on studies conducted in the US, which may also hold true for India, two-thirds of actively managed funds underperform the index funds over the long term.?
In India, so far we had index funds and exchange traded funds based on the Sensex and the Nifty (among the popular indexes). Now comes this index fund based on the S&P CNX 500, which represents around 72 industries, and covers nearly 92 per cent of all equity transactions. It is a broad-based benchmark that includes large, mid-cap and small-cap companies. According to Prasunjit Mukherjee, a Kolkata-based mutual fund analyst, ?Focused indexes such as the Sensex (a 30-scrip index) and Nifty (a 50-scrip index) include the high market cap companies. In 2006 to 2007, when there was a huge mid-cap rally, the S&P CNX would have beaten the Nifty or the Sensex. But over a longer period, such as three to five years, a broad index such as the S&P CNX 500 is likely to underperform the more focused indexes.?
If you look at the table, the Sensex and the Nifty beat the S&P 500 over the three- and five-year horizon, but the S&P 500 trumps both over the 10-year horizon. So, if the past is any guide, this is a good index to bet on for long-term wealth building.
Index funds are taxed like any other equity mutual fund: the long-term capital gain is tax exempt while short-term gains are taxed at 10 per cent.
So far, index funds have not caught on as much in India as in the West. ?Index funds have a lower expense ratio, and hence they pay lower commissions to intermediaries. Fund houses also allocate lower advertising and promotion budgets to these funds. Mostly index funds are bought due to the pull factor, when investors get disappointed with high-cost active funds that keep underperforming. The only way momentum can build up for index funds is through continuous education,? says Rajan Mehta, executive director, Benchmark Mutual Fund.
At present, of course, Benchmark?s is the only fund in the market tracking the S&P CNX 500. But when more fund houses launch funds based on this index, the right scheme to invest in will be the one with the least tracking error.
Should you invest?
If you believe in the merits of passive investing, invest in index funds. According to Sardesai, ?It becomes difficult to choose an actively managed equity fund as there is no consistency in their performance. Long-term investors with a horizon of five years or more should opt for these low-cost index funds.? According to Mukherjee, ?Right now it is difficult to analyse markets movements. By investing in the S&P CNX 500 index fund you achieve diversification. About 20-25 per cent of your portfolio should be in index-linked funds, and of this around 10 per cent could be put in this fund.?
