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Sunday, March 8, 2009

Two Index Funds that track the Nifty 50

In a post on Dec 8, '08, I had written briefly about the benefits of index funds and discussed about Nifty BeES, which is a ETF (Exchange Traded Fund). ETFs are traded like shares through brokers in a stock exchange, and just like for share trading, investors need to open a demat account.

In a subsequent post on Feb 22, '09, I had discussed about two balanced funds that may be more suitable for those investors who have less risk tolerance and don't have a demat account.

Index funds are ideal for the category of investors who are:

a) conservative but don't mind taking the risk associated with equity investments;

b) disinclined to track the performances of individual stocks;

c) not interested in opening a demat account

What are the specific benefits of index funds? They need very little management since they track the constituents of the respective indices. That means no dependence on the skills or whims of fund managers - leading to minimal management fees. Also, there is not much scope of out-performance or under-performance since an index fund tracks an index closely.

In the longer term, equities as an asset class tend to outperform all other assets. Regular investments in index funds provide long term wealth creation in a slow and steady fashion.

For more than 4 months, since the Sensex made a 52 week intra-day low on Oct 27, '08, there has been a rectangular sideways consolidation by the Sensex with no clearly discernible up or down trend. Such periods provide good opportunities for investments in index ETFs like Nifty BeES or index funds.

A couple of highly rated index funds that investors may want to consider are ICICI Pru Index Fund Retail and UTI Sunder, both of which track the Nifty 50 index. A brief summary of the funds are given below:-

1. ICICI Pru Index Fund Retail

Entry load - 1%, exit load - nil; Minimum lump sum investment: Rs 5000, subsequent investments: Rs 1000; Systematic Investment Plan (SIP) - available, minimum investments are Rs 1000 for monthly SIP and Rs 5000 for quarterly SIP; Systematic Withdrawal Plan (SWP) and Systematic Transfer Plan (STP) available; Dividend option available; top holding - Nifty Futures (65%).

2. UTI Sunder

Entry load - nil, exit load - nil; Minimum lump sum investment: Rs 10000, subsequent investments: Rs 2000; SIP, SWP, STP - NOT available; Dividend option available; top holding - Reliance Industries (11%).

Both index funds have marginally out-performed the Nifty 50 over all time periods. They have lost less during shorter time periods and gained more over longer time periods. This was possible because of some amount of tweaking of the weightage in the portfolio of the Nifty 50 stocks.

My personal preference is for an index ETF like Nifty BeES over an index fund because it is easier to buy and sell ETFs any time during the day at the prevailing price (whereas a mutual fund can be bought or sold up to 3 pm on the same day's NAV and after 3 pm on the following day's NAV).

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