Pioneer ITI Index Fund: Invest

Recommendation: Invest

Aarati Krishnan

WITH the equity markets at relatively low levels, this may be a reasonable time to make a long-term investment in equities.

An investment in an index fund is among the lower risk options available for investing in equities.

Investors wishing to protect against a further decline in the market can opt for systematic investment spread over the next six months. Passive index funds are designed to replicate the returns of a market index, with a small tracking error.

Index funds largely eliminate the risk of poor stock selection by a fund manager. From this perspective, this may be a good time to take an exposure in Pioneer ITI Index Fund, which is now open for subscription.

However, with much of the recent market interest concentrated in the large cap index stocks, the cyclical and FMCG stocks in the narrow market indices appear to be trading at relatively high valuations in relation to the rest of the market.

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Therefore, in the early stages of a market rally, the returns from an index fund could be limited. But this is bound to be evened out over the long term. Given the lack of depth in the equity markets, an investment in large cap index stocks, undoubtedly, carries a lower risk profile than outside the index universe. Investors with an investment horizon of three or more years can consider investing in this fund.

Pioneer ITI's Index fund offers two different options -- a Nifty Plan and Sensex Plan -- designed to track the S&P CNX Nifty and the BSE Sensitive Index respectively. The fund hopes to restrict its tracking error to plus or minus 2 per cent. That is, the fund's returns could vary from that of the benchmark index by a maximum of 2 per cent.

The fund also offers both dividend and appreciation options under both plans, along with provisions for systematic investment and withdrawal.

Whether an investor should choose the Nifty or the Sensex Plan would depend largely on his individual risk preferences. Nifty's portfolio of 50 stocks makes it a more diversified and well-spread portfolio than the Sensex. This could lower the risk profile of the fund, but could also moderate returns from this portfolio. The Nifty basket also carries a higher weightage to FMCG stocks (29 per cent in the Nifty against 21 per cent in the Sensex), than the Sensex. This could make it a more defensive portfolio than the basket of Sensex stocks.