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Should you invest in index funds?

November 13, 2004 18:01 IST

Not too long ago in August 2004, the markets were grappling with the 5,000 points mark; since then the equity markets have surged rapidly and the BSE Sensex is now precariously close to the 6,000 points mark.

In such a scenario, it would be interesting to study the performance of index funds. Index funds track major indices like the BSE Sensex and have their fortunes closely linked to the indices' performance.

Index Funds: Should you get invested?
Index FundsNAV (Rs)3-Mth1-YrIncep
TATA INDEX FUND SENSEX B 18.4813.80%20.71%45.74%
PRU ICICI INDEX 15.8113.44%14.78%19.18%
UTI-INDEX ADVANTAGE NIFTY 11.1713.41%13.44%17.53%
UTI NIFTY INDEX 11.7513.37%17.71%5.11%
BENCHMARK NIFTY 189.1913.35%18.21%20.68%
TATA INDEX FUND NIFTY B 17.7313.20%16.59%41.89%
MAGNUM INDEX FUND 17.2013.12%16.84%23.06%
UTI MASTER INDEX 18.4913.03%19.07%9.57%
HDFC INDEX (SENSEX) 56.4212.97%15.18%27.03%
BIRLA INDEX FUND B 19.2412.91%16.18%36.05%
(Source: Credence Analytics. NAV data as on Nov 8, 2004. Growth over 1-Yr is compounded annualised)

Over a 3-month period, index funds have pitched in smart performances; true to their character, these funds aptly mirror the strong growth witnessed in the equity markets.

But even the performances of top performers from the index funds segment i.e. Tata Index Fund (13.80%) and PruICICI Index (13.44%) may pale when compared to those of diversified equity funds over the same period.

Diversified Equity Funds: Strong performances!
Diversified Equity FundsNAV (Rs)3-Mth1-YrIncep
DISCOVERY STOCK 7.5722.10%15.62%-2.59%
PRU ICICI DYNAMIC PLAN 22.1521.53%19.26%48.67%
CHOLA MID CAP12.2721.12%-17.77%
TATA GROWTH FUND BONUS 13.2820.20%-6.60%
MAGNUM GLOBAL 15.2919.83%63.97%8.85%
UTI - DYNAMIC EQUITY18.1419.74%47.40%71.98%
KOTAK GLOBAL INDIA SCHEME12.3419.54%-25.35%
TAURUS STARSHARE 14.4319.35%36.03%4.46%
SUNDARAM SELECT MIDCAP 30.2318.36%42.76%63.28%
BOINANZA EXCL15.2818.36%4.03%9.98%
(Source: Credence Analytics. NAV data as on Nov 8, 2004. Growth over 1-Yr is compounded annualised)

Investors should realise that such a comparison is not fair because a diversified equity has the liberty to invest in stocks which are in flavour at the moment, unlike an index fund, whose universe is restricted to that of its benchmark index.

  • Rank the top performing diversified equity funds

    Index funds are also equipped to offer some distinct advantages to investors, for example when markets crash, index funds move with the markets and offer investors better protection vis-à-vis their diversified equity fund counterparts.

    While delivering returns is vital, the importance of capital preservation cannot be undermined by investors.

    Index funds also score on the expenses parameter. They typically have lower management fees and trading expenses, which in turn translates into better returns for investors.

    Finally index funds can help you build a diversified portfolio. Even within the equity funds segment investing in a variety of funds is always a smart move.

    Index funds offer the opportunity to invest in 'index stocks'; conventional diversified equity funds may or may not give investors the same chance.

    Index funds, despite their inability to match up to diversified equity funds in terms of performance can offer investors a fair degree of utility. Investors should consider holding at least a portion of their investible surplus in this moderate risk-return investment proposition.

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