What is the rationale for launching two passive funds - L&T Nifty 50 Index Fund and L&T Nifty Next 50 Index Fund?
The rationale is to offer investors the option of investing in popular indices covering a large part of the market, thus offering diversification through passive management with lower expenses. The Nifty 50 index fund invests in 50 blue-chip companies that are part of the Nifty index, while the Nifty Next 50 fund invests in the next 50 companies, as per market capitalisation.
Tell us more about L&T Nifty 50 Index Fund and L&T Nifty Next 50 Index Fund?
L&T Nifty 50 Index Fund
L&T Nifty 50 Index fund will track the Nifty 50 index. This scheme will adopt a passive investment strategy, thus offering sectoral diversification at lower operating cost. The scheme will thus invest in stocks comprising the Nifty 50 index in the same proportion as in the index, with the objective of achieving returns equivalent to the Total Returns Index of Nifty 50 index, by minimizing the performance difference between the benchmark index and the scheme.
The Nifty 50 index comprises of 50 stocks out of the approximately 1,600 traded stocks, representing about 65% of the free float market capitalization of the stocks listed on NSE, covering the major sectors of the Indian economy.
L&T Nifty Next 50 Index Fund
L&T Nifty Next 50 Index Fund will track the Nifty Next 50 Index, comprising of stocks that are the next 50 stocks by market capitalisation, after the 50 included in the Nifty 50 index. This scheme will also have a passive investment strategy, thus offering sectoral diversification at lower operating cost.
The scheme will invest in stocks comprising the Nifty Next 50 index in the same proportion as in the index, with the objective of achieving returns equivalent to the Total Returns Index of Nifty Next 50 index, by minimizing the performance difference between the benchmark index and the scheme. The Nifty Next 50 Index represents about 10-15% of the free float market capitalization of the stocks listed on NSE.
Both the index funds focus on large cap segment. Your comments.
The Nifty 50 covers around 60-65% of the free-float market capitalisation while the Nifty Next 50 index represents the 10-15% of the free-float market capitalisation. Together, they cover a very significant part of the Indian market for an investor.
In India where active funds make all the headlines, what is the future of passive funds?
Passive funds offer an option to investors who want to participate in the equity markets but don’t want to bear the risk of stock selection. Globally, the passive fund industry has been growing at a fast pace. While passive investing may not be a great story as yet in India; it is likely to pick up in future, as it offers investors a low cost method of participating in the equity market with almost no risk of stock selection.
The current market downfall has offered good entry point for investors. In such a scenario, why do you think investors should consider passive funds over active funds with better track record of out-performance?
Given the sharp index correction in the recent times, it is intuitive to expect a reasonable return over time, investing in the indices at such fallen levels, while taking minimal or negligible risk of stock selection. In the market, both active and passive funds co-exist and serve different types of investors and their investment needs.
Index funds are just a special type of mutual funds which is passively managed. These funds are being offered as another option available to investors to invest in the Indian equity markets, especially for investors who want only index returns or risk averse investors, who do not want to take stock specific risk. The Nifty 50 and Nifty Next 50 indices provide exposure to 100 diversified companies, which are amongst the sector leaders and thus offers coverage of a large part of the market in a passive way for an investor.
What should be the ideal allocation to passive funds in one’s portfolio?
The allocation level to passive funds in one’s portfolio depends on the risk appetite of the investor. Investors who are just getting their feet wet in the stock market could allocate more to index funds. It is best that investors seek an advisor’s help to decide the ideal allocation.
What are the benefits of passive funds over ETFs?
- ETF’s are bought and sold on an exchange and thus investors need a demat account while there is no such need for investment in an Index fund
- Benefit of an SIP is not available in ETFs, while index funds allow SIPs. And the fact that most investors will have to manually make additional investments in ETFs leaves further room for them to be less disciplined than they would be if they set up automatic investments with an index fund
- Index funds don't require investors to pay a broker commission to invest in the fund. ETFs, on the other hand, require investors to hire a broker to execute a trade for them. That can make ETFs more expensive than index funds despite their lower expense ratios, especially if an investor wants to invest a small amount every month
- Index funds allow holders to automatically re-invest dividends paid out by the fund back into more shares. That means an ETF won't track the index as efficiently if you are re-investing dividends
- For investors, especially beginners who are just looking to buy and hold, the ability to buy and sell ETFs throughout the day aren’t important. A buy and hold strategy can also help index investors avoid acting irrationally
- Index ETFs run a higher risk of bid-ask spread widening, when markets get volatile
Note: This article is a marketing initiative of L&T Mutual Fund.
