Investors must add index funds to their portfolios, say mutual fund advisors
Mutual fund advisors argue that index funds that follow a passive investment strategy to mimic certain indices are a cost-effective option for investors.
These advisors argue that index funds that follow a passive investment strategy to mimic certain indices are a cost-effective option for investors.
They also say the recent performance of index funds has bolstered their case. Perhaps reflecting the change in appetite for index funds, the assets (or AUM) managed by them have risen over the past couple of months.
The AUM of index funds has gone from Rs 5971.84 crore in August to Rs 6571.96 crore in September, and to Rs 7622.61 crore in October.
Apart from the new-found love of many mutual fund advisors for index funds, their recent outperformance also has contributed to their exalted status and swelling AUM.
“Many index funds have beaten the actively-managed schemes in the last one year when the market has seen a correction. Many investors look at the past returns to decide on which schemes they want to invest in and distributors are selling these schemes,” says Suresh Sadagopan, Founder, Ladder7 Financial Advisories, a Navi Mumbai-based wealth managing firm.
Mutual fund advisors say it is high time for investors to include index funds in their mutual fund portfolio.
“It is a low-cost, less-risky option for investors in a market where beating the benchmark is becoming more and more difficult. We believe that some allocation of your corpus in index funds is a must,” says Vishal Dhawan, Founder, PlanAhead Wealth Advisors, a Mumbai-based wealth advisory.
Mutual fund advisors and financial planners have been pointing out for a while that the market is moving towards index funds in a big way. The outperformance of index funds in the large cap category in the last two years has contributed greatly to this.
The biggest advantage of index funds is their lower costs. Investors can save 0.5% to 1.5% every year in an index fund. The savings can become significant over a long period.
Santosh Joseph, Founder, Germinate Wealth Solutions LLP, a Bangalore-based wealth management firm, says that having index funds in your portfolio saves you from higher volatility and the pain of checking your schemes.
“In a system where beating the benchmark is going to become more and more difficult for active schemes, especially for large cap schemes, it makes sense to just stay in the index. Active schemes have the bandwidth to beat the benchmark but with TRI and narrow-based rallies, it cannot be a consistent trend. So, taking extra risk on calls on schemes becomes unnecessary,” says Santosh Joseph.
So, should you switch to index funds? Well, you should if you are primarily invested in actively-managed large cap mutual fund schemes. According to advisors, investors can look at passive large cap schemes to save on the expense ratios and earn almost similar returns in the long term. “Investors should consider index funds, smart beta funds etc to save on costs and lesser volatility than the active funds. In narrow rallies that have been very frequent in the last couple of years, these schemes are a good bet,” says Suresh Sadagopan.
However, if you are investing in multi cap, mid cap or small cap funds, you can continue to bet on actively-managed schemes. Mutual fund advisors believe that there is still a lot of scope in small, mid and multi cap mutual fund categories to generate alpha or extra returns over their respective benchmarks.