Franklin India Index Tax Fund: A safe bet

Aarati Krishnan

THE sharp fall in the equity markets over the past couple of weeks appears to present a good investing opportunity for long-term investors who would like to allocate part of their assets to equities. However, in the Indian context, not many actively-managed equity funds have a long track-record.

And of those which have been in existence for five years, only very few actively-managed equity funds have consistently outperformed the markets year after year. Therefore, investors who would like to mitigate the risks posed by poor stock selection strategies can consider taking exposures to a passive index fund.

The Franklin India Index Tax Fund is the only index fund currently in operation which also offers investors the benefit of a 20 per cent tax rebate under Section 88 of the Income-Tax Act. The fund has a reasonable track-record since its launch.

Investors can, therefore, consider taking exposures to this fund. Though this is not normally the time of the year when investors make their tax saving investments, an investment made at this time would start out with the advantage of good timing. Investments carry the mandatory three-year lock-in period.

Suitability: As with other index funds, Franklin India Index Tax Fund is a suitable investment for the more conservative investors in equities. This fund carries two advantages. One, being a passive index fund, investors stand little risk of losing money on account of poor judgement on the part of the fund managers.

Secondly, since it tracks the S&P CNX Nifty, the fund is likely to remain reasonably diversified at all times, maintaining a portfolio of 50 stocks drawn from different sectors. Since index stocks are normally large cap stocks with high liquidity, investors can also minimise the cost associated with illiquid stocks in the portfolio.

Performance: Since its launch in February 2001, the Franklin India Index Tax Fund has seen its NAV lose 28.8 per cent in value, against a 30.3 per cent decline in the Nifty over the same period. This tracking error appears to be at acceptable levels.

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Portfolio: The portfolio mirrors the composition of the S&P CNX Nifty. Fast-moving consumer goods (FMCG) stocks currently account for the top sectoral weightage in the Nifty, with economically sensitive stocks accounting for another 31 per cent. Though some frontline FMCG stocks are currently trading at relatively high valuation levels, the stocks are defensive in nature and could provide moderate appreciation over the long term.

Fund facts: The Franklin India Index Tax Fund was launched in February 2001. The fund allows investors to take exposures in minimum lots of Rs 500. The fund charges neither an entry nor an exit load at present.