APN News

  • Thursday, July, 2020| Today's Market | Current Time: 07:42:31
  • Who knew that what was once looked down upon as ‘Bogle’s Folly’ would turn out to be one of the most acclaimed mutual funds of all time. John Bogle, the founder of Vanguard, was the first person to propose and initiate the idea of an index fund way back in 1976. Bogle had the vision of giving his clients the option of passive fund management which was frowned upon by many at the time. Today, index funds are one of the choices of mutual fund investors across the world and these funds are gaining popularity here in India too.
    If you wish to find out more about mutual funds and index funds, read further.
    What are mutual funds?
    Mutual funds are a pool of professionally managed funds where the fund manager buys / sells securities in accordance with meeting the fund’s investment objective. What AMCs (asset management companies) do is that they collect money from individuals sharing a common investment objective and invest this pool of funds across the Indian and foreign economy including stocks and other marketable securities like call money, government securities, treasury bills, corporate bonds, etc.
    What is an index fund?
    Securities and Exchange Board of India (SEBI), the regulatory body of mutual funds in India describes them as funds which, “replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc. These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as “tracking error” in technical terms.”
    The primary job of an index fund is to track or mimic its benchmark / underlying index with minimal or zero tracking error. Since there is no direct involvement of the fund manager, the scope for human error here is almost nil. Since there is no active involvement of the fund manager, index funds are also referred to as passively managed funds.
    Understanding index funds
    An index fund is supposed to invest a minimum of 95 per cent of its total assets in the securities of its underlying index. So if you invested a particular amount in an index fund, its performance will not depend on the fund manager, but on the performance of its underlying index. Hence, a lot of ‘know-nothing’ investors (a term coined by Warren Buffet) are usually given the advice of investing in index funds because as an investor you do not have to possess investment knowledge. This fund does the job for you and most of the times, and index funds have managed to outperform its benchmark. Also, because these funds do not involve the active participation of the fund manager, the expense ratio for owning these funds is much less as compared to other mutual funds.
    But remember that a low expense ratio should not be the only parameter for investors to consider investing in mutual funds. Remember that most mutual funds invest in equity and equity related instruments. Investments made in equity investments are subject to market volatility, and hence fund houses aren’t obligated to offer mutual fund investors with guaranteed returns. So it is better to understand your risk tolerance and invest only within your boundaries. Also, have a defined financial goal and understand your investment horizon. It is always better to align your investments with your goal, risk appetite and investment horizon. But if you are completely new to the world of investing or mutual funds in general, it is better that you consult a mutual fund expert.