Last Updated on January 1, 2016 at 9:38 am
“How to choose an index fund in India?”, Three people asked me this question in the last two days! My typical response is, “choose a Sensex or Nifty index fund, from the AMC you are comfortable with”. I thought let me expand my response a bit more.
Should I adopt passive investing in India?
Aarti Krishnan made an interesting point in the September issue of Mutual Fund Insight: Active mutual funds should stop using benchmarks like Nifty, Sensex, BSE 100 etc. which are liquidity based indices and instead should use strategic indices like
CNX Alpha (50 stocks with highest alpha),
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
NSE Quality 30 (companies with sustainable business models)
NV20 (value stocks in Nifty).
Cannot agree more. I will soon incorporate CNX Alpha in my mutual fund risk and return analyzer
If there are index funds which track such indices, it could well be a smart idea to choose these rather than active funds. Alternatively, one could just track these indices manually with a demat account.
So the answer is, yes one can adopt passive investing in India, but with the right index. Not many funds maybe able to beat such strategic indices (which are young) in future.
Alternatively, choosing a broad market index like CNX 500 (Goldman Sachs has a index fund for this) is also a good idea. However, many active funds do manage to beat CNX 500 easily.
The argument that alpha (extent of index outperformance) will disappear is true for the fund industry but not for investor folios. People who have significant alpha today with active funds are likely to retain that even if they switch to index investing later. Alpha of the portfolio is what counts.
Should I choose an index fund or ETF?
Stay away from Indian ETFs. In an ETF, you are buying and selling to other subscribers. If not many people are trading at any given time, it would be difficult for you to sell. If you cannot, the AMC after a while (need to see the scheme document – last I checked it was at least a few days), will buy it from you. Why bother?
If you want to follow passive investing, stick with index funds.
How about Nifty and Sensex index funds?
Index investing is for mature people. They recognize that with an index fund, they need not worry about fund manager performance. For them, this factor trumps the fact that active funds easily beat such indices. As long as they don’t compare their index funds performance with active funds, there is no issue with choosing such index funds.
That said, it is important not to delude oneself that the low expense ratio of the index fund will be a deciding factor in outperforming the more expensive active funds. There is no such evidence of that so far. Unless AMCs have the guts to choose the strategic indices mentioned above, I think expense ratio will not be a factor when it comes to comparing active funds and passive funds.
So how do I choose an index fund?
Once you decide the index to track and the way in which you are going to track (manually, ETF or fund) it, you can simply choose any AMC you are comfortable with. There is practically no difference in Sensex and Nifty movement. So you can choose what you are comfortable with.
What do you think?
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)