Frankling India Index Tax Fund -- Passive investing and tax sops

Suresh Krishnamurthy

Recommendation: Fresh investments can be contemplated in Franklin India Index Tax Fund. The fund offers investors the option of passive investing along with tax benefits under Section 88.

There is also a three-year lock-in period for investments. Investors can choose the dividend option of the fund. The net asset value of the fund is Rs 8.14 per unit.

However, investments of only up to Rs 10,000 are eligible for the tax rebate. In addition, for investors with a small corpus, it may be better to invest over an extended period through systematic investment plans than to invest in a lump sum.

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The attractiveness of an index fund stems from the excessive uncertainty that is clouding the stock market prospects of most sectors now. In this backdrop, investors who are desirous of limiting the downside stemming from this uncertainty can choose an index fund.

Suitability: The fund is suitable for investors with an appetite for market average risk. Generally, if investors have access to long-term funds, equities are an attractive asset class and by investing in an index fund the investor is exposed to moderate risks.

The Indian market gives substantial scope for active investing. However, for retail investors active investing comes with a greater degree of risk. In order to minimize such risks, passive investing for a part of the portfolio can be preferred.

For an investment in the fund to deliver value, some assumptions have to come good. For instance, take the weights of the respective sector in the index such as low weights to technology sector and high weights to the fast moving consumer goods sector.

This indicates that if consumer goods sector continues to outperform investors would gain. However, if they under perform then the value of investments may decline in the short-term. Therefore, only investors comfortable with such assumptions or investors with a long-term view can invest in the fund.

In addition, the fund has been in existence for only a short period. Therefore, its record in tracking the indices is not yet established. There is the risk that the fund might fare poor in tracking the indices.

Portfolio composition: Around 35 per cent of the portfolio is in the consumer good sector while around 34 per cent is invested in stocks of companies which are sensitive to the economy.

The exposure to the technology sector and the finance sector is pegged at 11 per cent. The sectors of healthcare and telecom bring the tail-end with exposure of 7 and 3 per cent respectively.

In terms of stocks, the leading exposures are Hindustan Lever, Reliance Industries, Infosys Technologies, Reliance Petroleum and ITC. These five stocks account for around 51 per cent of the portfolio.