The World of Investments and Money

Sunday, December 31, 2006

Are Index Funds better than other Mutual Funds ?

I have read at some places that index funds are better than other mutual funds. An example is this blog. Index funds are investment schemes that invest in representative shares of a particular stock market. For example, a fund can have Index fund for BSE or NSE or some other exchange. These funds try to replicate the behaviour of that particular market. For this reason the NAV of these funds rise and fall with the market they are trying to replicate. The main advantage of these funds is that these are automated with no active management needed. So the entry load (the charges paid when you buy a MF) and exit load (the charges when you sell your units) and other charges are low. So, it is generally thought that Index funds earns an investor more profit as compared to other funds like equity diversified mutual funds. I decided to check this yr's results for the Indian market. Hardly 4 index funds have managed to beat the market in 2006. This is called tracking error when automated calculation misses the market behaviour by some points. The best performer has a growth of 49.8% in 2006. On the other hand, about 30 equity diversified mutual funds beat the markets with growth of the best performer being 61.6%. Even after deducting the charges, it is clear than equity diversified funds managed to beat the index funds hands down. Even after assuming that the total number of index funds available to investors is less than the total number of equity diversified funds, it is clear that Index Funds are no better performers than other funds. At least 2006 proved that. The same is true even if we compare last 2 or 3 yrs results.
Check the performance of Index funds here and the performance of Equity diversified funds here.


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Raj Gopal Vuppala said...

In Indian markets many good mutual funds have always beaten the index. Hence investing in diversified mutual funds is advisable in India. (Only times when index funds have performed better than diversified funds is during volatile times. But overall diversified equity funds are the way to go while investing in India).

The case is different in US, where index funds better than most diversified funds over long term. But we can say the same in Indian market.

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