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Aarati Krishnan

BIRLA Index Fund, a passive Index Fund tracking the S&P CNX Nifty is currently open for subscription. Though this appears to be a good time to enter the equity market, investors (especially those with no equity investments in mutual funds) may avoid taking exposures in this fund for the present. This recommendation is not a reflection of the fund management track record of Birla Mutual Fund. Rather, it has to do with the unattractiveness of index investing per se.

Two factors make passive index investing unattractive in the Indian context. One, indices such as the S&P CNX Nifty (which Birla Index Fund plans to track) represent too few stocks and may not fully capture broad market trends.

For instance, the S&P CNX Nifty presently has around a fourth of its weightage concentrated in just two stocks — Hindustan Lever and Wipro. Both these stocks carry relatively high valuation levels now. Should either of the two stocks fail to participate in a market rally, this would impact the performance of the Nifty and, thus, of index funds tracking the Nifty.

Two, over the past five years, more than half of the actively managed equity funds have outperformed indices, such as the Nifty and the Sensex. Going forward, the margin of outperformance may narrow. But investors who already have investments in actively managed equity funds, may have a place for a passive index fund in their portfolio. Index funds carry a couple of apparent advantages. They help investors avoid taking any call on the fund management skills of a particular manager and they make timing relatively easy (investors can enter the fund at low index levels and exit at high index levels). However, even in this case, it may be better to wait for a fund to accumulate a track record (in terms of tracking error), before considering investments.

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