Index funds are a type of equity mutual fund that can invest only in the market indices like Nifty 50, Sensex. It is also called as passive funds.
This fund was introduced globally in the year 1975 by the legendary value investor John C. Bogle. Vanguard 500 Index was the first managed index fund.
In India, index funds are becoming an alternative to actively managed funds. The reason behind this is, in the last 3 years major index funds have performed better than active funds.
Even the Emperor of value investing Warren buffet too recommends passive funds than to invest in active funds.
INDICES IN INDIA:
The index is termed to describe an overview of a nation’s share market condition. We have two stock exchange in India which invest in the equity market. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
The index of NSE is known as NIFTY. This NIFTY is basically nifty 50, which holds 50 tops companies stocks in their portfolio. Since there is more diversification most people trade at Nifty.
The index of BSE is known as SENSEX. Sensex basically holds 30 top companies stocks.
In simple terms, the value of both indices will be similar. This shows the bullish and bearish behavior of our stock market.
DEMERITS OF ACTIVE FUNDS:
· Equity is not as easy for everyone due to its risk appetite.
· Hence, we choose mutual funds, which are managed by a fund manager. Mutual funds have diversification of stocks, but all the shares will be decided by fund managers only.
· These active funds have a huge expense ratio in both regular and direct investments;
§ Regular Funds – 1.5% – 2.5%
§ Direct Funds – 0.7% – 1.5%
· Since it needs active management, the risk involved is moderately high. Investors will not have any idea when fund NAV falls.
IMPORTANCE OF INDEX FUND:
· Since it is a passive fund, it has no major role for the fund manager.
· The investors who don’t have time to learn and analyze on market can ultimately choose index fund and invest for 20 years period.
· The fund has to be similar to Nifty Index holdings. So, we can track performance and market conditions.
· Many Index funds offer an expense ratio of 0.1%. This will increase the performance of the fund.
· Also, we can analyze when to quit and when to start investing depending on market conditions.
· Index fund, is useful for people with zero knowledge on equity and looking for a fair return of 10-12% per annum.
· Over the last 5 years, Passive funds have surpassed many active 5 star funds.
UTI NIFTY 50 FUND VS HDFC TOP 100 FUND:
We cannot point out on passive funds perform better than active funds. We should have a clear analysis or comparison between the two funds.
Hereby, we have taken UTI Nifty Index Direct-Growth fund in one hand and HDFC Top 100 Direct Growth fund on the other hand.
Let’s compare the performance of 5 years, 3 years, and the last 1 year. Also, we can check the reward and Risk analysis of these funds.
As per the above-attached image, we can understand more insights on, how Index fund will beat all the actively managed mutual funds.
· In the above-mentioned graph, the over all UTI Nifty Index has shown a positive movement than HDFC Top 100 fund.
· Both funds are compared with the Direct and growth option. So the expense ratio of UTI Index Fund Vs HDFC Top fund is 0.1% vs 1.28.
· The difference in expense ratio is 1.18%. The difference between 5 years of performance between these two funds is 1.83%. The main problem is the high expense ratio.
· The risk of HDFC Top 100 funds have high risk when compared to category and NIFTY 50.
· UTI Nifty Index Fund vs HDFC Top 100 fund – Performance
§ 1 Years – 0.21% vs -10.78%
§ 3 Years – 4.71% vs -0.75%
§ 5 Years – 6.35% vs 4.72%
· If an investor invests Rs. 1 lakhs, the 5 years returns will be
§ UTI – Rs. 1.35 lakhs
§ HDFC – Rs. 1.22 Lakhs.
· UTI Nifty Index fund has shown a 10.65% high return than HDFC TOP 100 fund.
To check the risk and reward calibration of your fund. Please visit morningstar.com
· Investing in equity will yield a good return to overcome the inflation rate.
· It is wise to choose between the funds.
· Investing in lower expense ratio funds will give you increased in return.
· Passive funds have shown a good return when compared to most of the actively managed funds.
· With the difference between UTI Nifty Index fund (Passive) and HDFC Top 100 fund (Active). The passive fund has shown more than 10% higher return than active funds.
· Most of the active funds are still in negative in the last 3 year’s performance.
· When you plan to invest in mutual funds, always prefer Index funds.