Index Funds are mutual funds, which are based on an underlying index, such as the Nifty 50 or the Sensex. Index Funds are passively managed funds, meaning that the fund manager plays an inactive role in managing the fund. These funds try to replicate the underlying index with the exact weight given to each stock as in the underlying index. The expense rate of index funds is much lower than the actively managed funds as no research needs to be done to find out which stocks will outperform the market or the benchmark index. The portfolio of such funds is adjusted merely so that it replicates the index which it intends to track. Index funds suffer from a minor error called the tracking error, which is the difference between portfolio composition of the index and the index fund. The tracking error could be positive or negative, but is usually very small. Index funds can be bought and sold just like actively managed mutual fund schemes.
In western countries Index funds usually outperform the actively managed funds because the index is very methodically selected. The portfolio of the index in western countries resembles and replicates the economic progress of the country in a much better way than in India. Hence it becomes difficult for western fund managers to beat their index funds by managing funds actively. However in India, the indexes have so far been unable to portray an accurate view of the economy. They are more a reflection of the largest companies in terms of price and volume of trade that occurs on a day to day basis. Some examples of Index funds in India are:
o UTI Nifty Index Fund.
o Franklin India Index Fund -NSE Nifty Plan.
o SBI Nifty Index Fund.
o ICICI Pru Nifty Index Fund.
o IDBI Nifty Index Fund.
o HDFC Index Fund- Nifty Plan.
o Reliance Index Fund – Nifty Plan.
o HDFC Index Fund – Sensex plan.
Globally and in Developed Countries, Index Funds and Exchange Traded Funds are widely used as an alternative to Mutual Funds. The Fund Manager actively manages Mutual Funds in terms of the Stocks or Bonds in which the fund invests. Indexes are designed and developed by Financial Research Organisations such as Morgan Stanley Capital International, Standard & Poor, CRISIL, etc. Certain Stock Exchanges, Index Funds and Exchange Traded Funds adopt these indices as a benchmark to facilitate purchase and sale of Stocks and Bonds as a basket or as a good representation of an Economy, Industry or Country.
Index Funds are of three types, Global Index like the MSCI World Index, Regional Index like the Euro Stoxx 600 in Europe and National Index, like the NSE Nifty 50 or S&P BSE 500. Investing through an Index gives the same benefits as Mutual Funds but saves on the Cost or the Expense Ratio. The Expense Ratio of an Index Fund or ETF is significantly lower than a Mutual Fund. Whereas Fund Manager constantly shuffles the portfolio in the hope of including the best Stocks and Bonds in the market, An Index Fund buys the Stocks or Bonds in the index in the proportion of their weight in the Index and holds them. The constituents are dropped or changed only when they cease to be a part of the Index. Index Funds and ETFs are also better than investing in Stocks as they provide diversification and protect against the risk of investing in Individual Stocks.
Exchange Traded Funds are also Index Funds, but they are listed on a Stock Exchange like a Share. Individuals and Organisations can purchase and sell the Units of an Index Fund on a Stock Exchange at the prevailing NAV. The demand and supply of units determine the Sale price of the ETF units. The Sale price could be at a slight discount or premium to the NAV.
Every major Stock Exchange in the World has ETFs registered on them. All major Mutual Fund Companies offer Index Funds. Usually, ETFs and Index Funds are local to a particular Country or Continent, but international ETFs and Index Funds are also widely available. The largest Asset Management Companies in the World, the BlackRock Group and the Vanguard Group both offer international ETFs and Index Funds. Such Funds invest in foreign Countries and Continents. The Fund Management charges are a fraction of the invested amount. ETFs also incur transaction charges at the Stock Exchange.
Investors can build Solid portfolios with exposure to Indian as well as other Country and Continent specific Stocks by investing in ETFs. ETFs enable investors to build a Nation-wise or Continent specific portfolio with one or two indices per geography. It provides simplification and global diversification.
Some of the popular ETFs from iShares (BlackRock) and the Vanguard Group are mentioned below:
1. IShares Core S&P 500 ETF.
2. IShares China Large Cap ETF.
3. IShares MSCI India ETF.
4. IShares MSCI India Small Cap ETF.
5. IShares MSCI South Korea ETF.
6. IShares Russell 2000 ETF.
7. IShares MSCI Switzerland ETF.
8. FTSE All World Ex-US ETF.
9. FTSE All World Ex-US Small Cap.
10. FTSE Emerging Markets ETF.
11. Russell 2000 ETF.
12. S&P 500 ETF.
13. Total International Stock ETF.
14. Total World Stock ETF
Mungekar Wealth 