GEMGAZE

May 2016 

At Berkshire Hathaway’s Annual General Meeting last week, Warren Buffett said that investors can make good returns by investing in index funds, which are passive funds. Citing the example of Vanguard Group index fund that tracks the S&P 500 index of large American companies, Buffett said that passive, unmanaged or ‘no energy’ investments can do just as well, or better, than ‘hyperactive’ investments handled by managers who charge high fees. Does this principle of making good returns from passive index funds or Exchange Traded Funds hold good in the Indian markets too? Can Indian investors follow this investment philosophy of Buffett? Not entirely. The big difference is that in the USA most indices are available to investors. But India is still more of an emerging equity market, where new companies are still being discovered and are yet to be listed or become part of the index. Because we have so much scope of investing outside of indices, investors are able to make money by investing in actively managed funds.

In the Indian market any fund manager provides lot of alpha over the index. In the case of actively traded large-cap funds, the returns could be higher than the index by 200-300 basis points over a five year period. While in the case of mid-cap funds the returns could be even higher. That is why over the long-term actively managed funds will give better returns. The biggest advantage of index funds is the low cost. The expense ratio of most index funds is less than 1. Another advantage of index funds is the low volatility. In the longer run, active funds do give higher returns because of the exposure to mid-cap stocks and mix of stocks. However, investors in index funds can enhance their returns by investing more when the indices are trading lower, say 11 or 12 Price/Earnings ratio and exit when the indices gain. According to data from Value Research, five-year returns from the top five large cap equity funds have been in the range of 8.18 to 12.26%. While the returns for index funds have been in the range of 6.37 to 7.16%.

The sparkling GEMs among the index funds in India in 2015 have retained their preeminent status in 2016 also.

Goldman Sachs Nifty ETS Fund Gem

Launched in December 2001, Goldman Sachs Nifty ETS Fund, the first ETF in India, has an AUM of Rs 965 crore. It is an Exchange Traded Fund which is listed on the capital market (rolling settlement) segment of the NSE. The fund aims to provide returns close to the total return of stocks as represented by Nifty 50 Index. Large caps rule the roost with 98.67% of the portfolio in large cap stocks. 99.64% of the assets are in equities. 58.84% of the assets are in the top three sectors, finance, technology, and energy. The one-year return of the fund is -6.17%, trailing the category average of -2.83%. The returns of the fund are benchmarked against the Nifty 50 Index. The expense ratio of the fund is 0.49% and the portfolio turnover ratio is 130%. The fund is managed by Payal Kaipunjal since May 2014.

ICICI Prudential Index Fund Gem 

The AUM of ICICI Prudential Index Fund, launched in February 2002, which has been hovering around Rs 91 crore last year, has reached Rs 199 crore at present. The fund aims to closely track the performance of Nifty 50 Index by investing in almost all the stocks and in approximately the same weightage that they represent in the index. Large caps constitute 98.6% of the portfolio, with 99.1% of the assets in equity. The top three sectors, finance, technology, and energy, account for 58.23% of the portfolio. The one-year return of the fund is -3.83%, less than the category average of 2.83%. The returns of the fund are benchmarked against the Nifty 50. The expense ratio of the fund is 0.79% and the portfolio turnover ratio is 8%. The fund is managed by Kayzad Eghlim since August 2009.

Franklin India Index Fund Gem

The AUM of Franklin India Index Fund, launched in August 2000, is Rs 213 crores. This open ended index linked growth fund, with the objective to invest in companies whose securities are included in the Nifty and subject to tracking errors, endeavours to attain results commensurate with Nifty 50 Index. Large caps constitute 99.15% of the portfolio, with 96.54% of the assets in equity. The top three sectors, finance, technology, and energy account for 58.5% of the portfolio. The one-year return of the fund is -3.97%, as against the category average of -2.83%. The returns of the fund are benchmarked against the Nifty 50. The expense ratio of the fund is 1.06% and the portfolio turnover ratio is 9%. The fund is managed by Varun Sharma since November 2015.

Principal Index Fund Gem

Launched in June 1999, the AUM of Principal Index Fund is Rs. 25 crores. The fund can invest up to 100% in Nifty stocks, and can take up to 10% exposure in money market securities. Large caps constitute 99.17% of the portfolio, with 97.28% of the assets in equity. The top three sectors, finance, technology, and energy account for 59.06% of the portfolio. The one-year return of the fund is -4.14%, as against the category average of -2.83%. The returns of the fund are benchmarked against the Nifty 50. The expense ratio of the fund is 1% and the portfolio turnover ratio is 31%. The fund is managed by Rajat Jain since August 2015.

HDFC Index Sensex Plus Fund Gem

Launched in July 2002, HDFC Index Sensex Plus Fund sports an AUM of Rs 117 crore. The fund aims to invest 80 to 90% of its assets in the companies that form the Sensex and between 10 and 20% of the assets in the companies which are not included in the Sensex. This fund has always had a large-cap tilt with 92.19% in large caps and 99.85% in equity. The one-year return of the fund is -5.56% as against the category average of -2.83%. The top three sectors of the fund are finance, technology, and energy. 56.56% of the assets are in the top three sectors. The fund is benchmarked against the S & P BSE Sensex. The expense ratio of the fund is 1.08% and the portfolio turnover ratio is 14%. The fund is managed by Krishan Kumar Daga since October 2015.

UTI Nifty Index Fund Gem

The AUM of UTI Nifty Index Fund is Rs 366 crores. This open-ended passive fund was created by merging UTI Sunder and UTI Master Index fund on March 14, 2012. This fund has the objective of investing in securities of companies comprising of the Nifty 50 in the same weightage as they have in Nifty 50. The fund strives to minimise performance difference with Nifty 50 by keeping the tracking error to the minimum. Large caps constitute 98.65% of the portfolio, with 100% of the assets in equity. The top three sectors, finance, technology, and energy account for 60.759% of the portfolio. The one-year return of the fund is -3.65%, as against the category average of -2.83%. The returns of the fund are benchmarked against Nifty 50. The expense ratio of the fund is 0.19% and the portfolio turnover ratio is 77%. The fund is managed by Kaushik Basu since July 2011.

Tata Index Nifty Fund Gem

Launched in February 2003, the AUM of Tata Index Nifty Fund is Rs 9 crores. The fund aims to provide medium to long term capital gains, by investing in equity shares of only those companies comprised in the Nifty 50 Index and in the same proportion as that of the index, regardless of their investment merit. Large caps constitute 98.53% of the portfolio, with 99.15% of the assets in equity. The top three sectors, finance, technology, and energy, account for 58.20% of the portfolio. The one-year return of the fund is -4.19% as against the category average of -2.83%. The returns of the fund are benchmarked against Nifty 50. The portfolio turnover ratio is 16%. The fund is managed by Sonam Udasi since April 2016.