How to choose an index fund in India?

Published: September 5, 2015 at 9:36 am

Last Updated on January 1, 2016

“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),


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?

Do share if you found this useful

We now publish both equity fund and debt fund (+ hybrid fund) screeners each month!
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video!  More than 415 investors and advisors use this!
Unlock the secrets of successful financial advisors and entrepreneurs with our new course!
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
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 for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Join our courses in exclusive Facebook Groups!

  • 550+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). 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 how to achieve by showcasing your skills and building a community that trusts you and pays you!
  • Goal-based portfolio management! Join 2220+ members and get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content)  in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only 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
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis 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

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, 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 199 (instant download)
Free android apps