WHAT IS INDEX FUND?Index fund is a mutual fund or exchange traded fund that aims to replicate the movements of an index of a specific financial market. It follows a passive investing strategy called indexing.For example, it involves tracking an index like the sensex or the nifty and builds a portfolio with the same stock and with the same proportions as the index. The funds make no effort to beat the index and in fact it tries to earn the same return.
INDEX FUND IN INDIAN CONTEXT• In the Indian market scenario index funds may not be the best option. The basic principle of indexing is - the more the number of stocks comprising an index the better is the diversification and price discovery. Indian indices like the Sensex (30) and the Nifty (50) cover a relatively small number of stocks and ignore many opportunities in the mid- cap sector.• Unlike the capital markets in developed countries, Indian markets havent been thoroughly researched and there is enormous scope to beat the market by sound research.
ADVANTAGES As per efficient market concepts index funds provide optimum return in the long run. An index fund does not have to pay for expensive analysts and frequent trading. Index fund has a broad index which is less volatile than the specific stock or sectors, thereby lessening risks for investors. Index funds are tax friendly so a substantial tax savings can be earned.
DISADVANTAGES Possible tracking error from index Since index funds aim to match market returns, both under- and over-performance compared to the market is considered a "tracking error“ by holding too much cash. Cannot outperform the target index Index fund seeks to match rather than outperform the target index. Therefore, a good index fund with low tracking error will not generally outperform the index, but rather produces a rate of return similar to the index minus fund costs. Index composition changes reduce return Whenever an index changes, the fund is faced with the prospect of selling all the stock that has been removed from the index, and purchasing the stock that was added to the index.
HOW ARE INDEX FUNDS TRADED? While trading in index funds offers broad market exposure, it involves low operating expenses. The reason for low expense ratio is because most index funds are not actively managed. This type of model is called passive fund management. Index funds are based on a theory known as the efficient market hypothesis (EFH). This theory states that as stocks are valued with accuracy, it is not possible to beat the market easily.
FEATURES OF PLANS Nifty Plan:To generate returns that are commensurate with theperformance of the Nifty, subject to tracking errors.SENSEX Plan:To generate returns that are commensurate with theperformance of the SENSEX, subject to tracking errors.SENSEX Plus Plan: To invest 80 to 90% of the net assets of the Plan incompanies whose securities are included in SENSEX andbetween 10% & 20% of the net assets in companies.
INITIAL ISSUE EXPENSESThe initial issue expenses scheme will be borne by the AMC. In respect of each purchase / switch - in of Units, upto andincluding Rs. 5 lakh in value, an Exit Load of 1% is payable ifUnits are redeemed / switched-out within 1 year from the dateof allotment. In respect of each purchase / switch - in of Units, greaterthan Rs. 5 lakh in value, no Exit Load shall be payable.These are collected from the HDFC bank.
LIQUIDITY OF THE SCHEME The Scheme will offer for Sale and Repurchase Units at NAV based prices on every Business Day on an ongoing basis, commencing not later than 30 days from the closure of Initial Offer Period. Under normal circumstances, the Mutual Fund will Endeavour to dispatch the Redemption Cheque / draft within 3 Business Days from the acceptance of the Redemption request.
INITIAL OFFER PRICE OF THE SCHEME Rs. l per Unit for cash at par (The face value of the Units will be based on the closing value of the respective indices as at the Date of Allotment in the proportion : 100 Units = Value of the Index) Target Amount Index Fund seeks to raise minimum subscription amount of Rs. 1 lakh under each Plan
ASSETS AND DETERMINATION OF SCHEME Once a Stock Exchange has been selected for valuation of a particular security reasons for change of the exchange shall be recorded in writing by the AMC. When a security is not traded on any stock exchange on a particular valuation day, the value at which it was traded on the selected stock exchange, on the earliest previous day such date is not more then 30 days prior to valuation date. When a debt security is not traded on any stock exchange on a particular valuation day, the value at which it was traded on the principal stock exchange or any other stock exchange, on the earliest previous day such date is not more than 15 days prior to valuation date.
PIE CHART SHOWING MARKET SHARE Market Share Shares Mutual Fund Bonds Index Fund ULIPS 11% 6% 22% 36% 25%
FREQUENTLY ASKED QUESTIONS BY PEOPLE What is an index fund whats the difference between an index fund and equity fund? How do I start placing money in an index fund? How easy is it to start an index fund? If not index fund then what are they interested in?
Index fund: Investment fund designed to match the returns on a stock market index. Mutual fund whose portfolio matches an index. These types of funds have a certain investing philosophy they have to follow that can be found in the funds prospectus. They are also typically actively managed which means that a fund manager or managers actively buy and sell inside the fund to try to beat the performance of the indexes
. Buy shares in an index fund. (ex. Vanguard 500 Index Fund, tracks S&P 500)2. Buy shares in a ETF. (ex SPY, tracks S&P 500)In practice, these two ways are very similar. The difference is that index funds usually have no transaction costs for buying/selling, but can only be bought through certain authorized brokers and might charge a fee if you have a low account balance. ETFs are traded on the stock market and can be bought through *any* brokerage (ex. etrade), but you will almost certainly be charged a fee for buying/selling. First step would be to register with the SEC as an investment company. As an investment company you would be required to meet specific reporting and information guidelines mandated by the
QUESTIONS ASKED TO: NAME OCCUPATION INVESTMENTR.K.Neogi Service IndexProsenjit Sen Engineer EquitySumit Agarwal Business Mutual fundPrasant Khanna Business BondSumanta Ray Teacher EquityRamakant Jha Student EquityS.N.Singh Doctor BondRamesh Mehra Business IndexSunil Prasad Student EquityR.G.Singh student Bond
LEARNING Understanding different investment schemes. Knowing in details about index funding. Gaining practical knowledge about share market. Contribution of banking sector in other financial sector.
SOURCES• Financial analyst of HDFC bank, RDC, Rajnagar.• Websites: - www.hdfcbanks.com - www.index-fund.html - www.investowords.com• Magazine- Asset management