Index Mutual Fund – The first step for a Mutual Fund Retail Investor

Index Mutual Fund – The first step for a Mutual Fund Retail Investor

The index fund industry in India is younger as compared with the developed countries. Though the investors invest in mutual funds, very few of them are really aware about the concept of Index Fund. In fact most of the major fund houses have already launched index funds while many others are on way to launching. Thus there is ample availability of index funds for the investors. On the other hand a common investor of the Indian stock market and mutual funds is aware of the concept “Sensex” and “Nifty”. These two are the indices of Indian stock market namely Bombay Stock Exchange and National Stock Exchange.  Many times a common investor takes his investment decision on the basis of levels of these indices. An Index Fund which comprises mainly of these benchmark indices’ investment strategy which definitely suit the needs of this common investor. Index funds may also increasingly play a major role in public policy formulation. For example, Dave Committee has recommended that equity investments by pension funds should exclusively be done using index funds. Similar arguments can, in principle, be made in the insurance sector also.

Index funds simply try to replicate the returns on a chosen market index and aim to deliver the returns and the risk of that index. Evaluating an index fund’s performance mainly concentrates on observing how closely a fund tracks the underlying index. This is measured in terms of ‘tracking error’. A well–managed index fund is one which exhibits low tracking error. The job of an index fund manager is therefore to minimize the tracking error.

A retail investor who is new to the mutual fund investment should start his investment with Index Mutual Funds which is safer as compared to other diversified and sectorial funds. Thus the first step for a new investor should be the investment in index fund having lower tracking error. Investment through Systematic Investment Plan (SIP) in such funds for a longer duration will give an added advantage for such investors.

Dr. Virendra Tatake 

 

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