Monday, May 10, 2010

GEM GAZE

INDEX FUNDS

May 2010

Passive investing is the average investor’s best bet. The discipline of buying during downturns lowers average cost of acquisition. Indeed, investors who continued buying systematically through the crisis are head and shoulders above the crowd. A purely passive investor will stick to systematic investments. This tried and tested approach beats over 90 per cent of active market strategies.

Only three index funds have managed to enter the elite club of GEMS in May 2010.

Benchmark Banking BeES Gem

The fund sports an AUM of Rs 70.30 crores, a dramatic slide from the Rs 7400 crore in 2007 (Rs 107.4 crores in 2009). This can primarily be attributed to the Reserve Bank of India voicing its displeasure about FIIs using it as a back door to gain entry into banking stocks and the subsequent exodus by the FIIs. But the one-year return is 65.52% as against the category average of 42.36%. The S&P CNX Nifty and the Sensex returned 36.22% and 38.39% respectively during the same period. While the expense ratio is a mere 0.5%, the portfolio turnover ratio is 218%. This is understandable, it being an ETF.

ICICI Prudential Index Fund Gem

The fund’s AUM stood at Rs 93.96 crores as on April 30, 2010. The one-year return is 35.35% as against the category average return of 42.36%. ICICI Prudential Index Fund managed a return of 21.48% over eight years with growth in the Nifty at 20.15%. This outperformance could be partially due to an element of active management. To enhance returns, ICICI Prudential Index Fund invested 15.48% of Rs 96.6 crore in the futures market on March 31 2010. The expense ratio and portfolio turnover ratio are high at 1.5% and 148% respectively. The tracking error is 2.28%.

Birla Index Fund

The total AUM of the fund is Rs 32.6 crores and its one-year return of 35.02% lags behind its category average returns of 42.36%. The fund has a high expense ratio of 1.5% and a high portfolio turnover ratio of 186%. The tracking error of the fund is 2.65%.

Can Robeco Nifty Index Fund

This Rs 9 crore fund has exhibited a lacklustre performance – a one-year return of 35.16% as against the category average of 42.36%. It has a reasonable expense ratio and portfolio turnover ratio of 1% and 10% respectively. The tracking error is 1.71%.

Franklin India Index Fund Gem

Franklin has index funds that track both the Sensex and the Nifty with AUMs of Rs 64.75 crores and Rs 131.05 crores respectively. The one-year returns have been 37.75% and 35.79% respectively with expense ratios pegged at 1% in both the funds. The portfolio turnover ratios are 15.33% and 18.29% respectively. The tracking error is 1.84%.

Principal Index Fund

Principal Index Fund has an AUM Rs 20.37 crores and a one-year return of 34.96%. The expense ratio and tracking error are reasonable at 0.82% and 0.86% respectively. The portfolio turnover ratio is 23%.

UTI Index Equity Fund

The Fund has the highest AUM of Rs 232.29 crores (low by international standards) among the index funds in India. The UTI Nifty Fund managed returns of 13.38% over 10 years with growth in the Nifty at 12.92%. UTI Nifty Fund has put some money in futures and bank deposits. This shows how index funds are trying to manage money actively to outperform the benchmark and show greater returns. They are also known to be trying to time the market, something that explains under performance leading to tracking error. The one-year returns at 34.99% lag the category average. The expense ratio is at 1.5%, the maximum limit specified for index funds by SEBI. The portfolio turnover ratio is 57.4%.

Tata Index Nifty Fund

The AUM of the fund is a dismal Rs 9.99 crores. The one year return at 35.08% lags the category average. The expense ratio at 1.5% is the maximum limit allowed. The portfolio turnover ratio is 13% and the tracking error is 0.63%.

LIC Index Fund

The LIC Index Funds replicating both the Nifty and the Sensex have AUMs of Rs 81 crores Rs 33.85 crores respectively. The one-year returns have been 32% and 35.16% respectively. The expense ratios and portfolio turnover ratios have been on the higher side at 1.37% and 1.12%, and 234% and 108% respectively. LIC Index Fund has the dubious distinction of having the highest tracking errors of 2.68% and 7.53% respectively. Overall, the performance of the funds have been dismal.

SBI Magnum Index Fund

The fund has an AUM of Rs 29.82 crores and a one-year return of 35.24%. The expense ratio, portfolio turnover ratio, and tracking error are all on the higher side at 1.5%, 184%, and 2.64% respectively. Not so encouraging performance.

Indian index funds fall prey to active investing and hold cash resulting in tracking error and expense ratio far higher than the optimum levels recommended. The funds that follow passive investing in letter and spirit are the GEMs in this category and they are the ones that should adorn your portfolio.

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