Books
Columnists
Indian Tax
Insurance
Interview
Mutual Funds
NRI Tax
Personal Finance
Personal Banking
Real Estate
Stocks

Franklin India Index Fund

Aabhas Pandya

With the launch of Franklin India Index Fund (FIIF) from Templeton Mutual Fund, the number of passive index funds in the Indian mutual fund industry has gone up to four. Franklin India Index Fund, which closes on July 13, 2000, will track the 50-stock S&P CNX Nifty.

This essentially means that the fund will replicate the constituents (or companies) of S&P CNX Nifty with precisely the same weightage as in the index. Thus, an index fund will be as good as the index it tracks, except for the cost of managing the index fund, which leads to a variation in returns.

An index fund is ideally suited for those investors who are willing to take exposure to equities but with minimum volatility. Index funds are probably the most diversified among equity funds since they mimic the index, which itself is spread across a wide spectrum of companies and industries.

For instance, the S&P CNX Nifty represents as many as 23 sectors. Apart from the virtues of a diversified portfolio, which keep volatility low, index funds work on low operating costs because there is no active buying and selling of stocks. In other words, index funds do not attempt to beat their respective benchmark, which keeps transaction costs low. This, in turn, gives a prop to the net asset value.

For instance, in the US, which has almost $ 600 billion under index funds, the average annual expense ratio is around 0.5 per cent. The Vanguard 500 Index, which is the largest index fund in the US with a size of over $ 105 billion, has one of the lowest annual expense ratio of 0.18 per cent.

Even in the domestic fund industry, IDBI's Index I-Nit '99 has an expense ratio of only 0.91 per cent for the one-year ended March 31, 2000. The low expense ratio is impressive, given the inefficiency in the Indian markets and problems of transactions on account of relatively illiquid situations. Besides, the expense ratios gradually come down as assets under management increase.

''The costs will be a function of assets under management. If we can increase the assets under management, the fees will come down. The US also started the same way and gradually reduced the fees when the market expanded,'' says Nilesh Shah, chief investment officer, Templeton Asset Management Company.

Curiously, none of the asset management companies with index funds attach significant importance to operating costs. In fact, these funds state normal annual expense charges in their offer letters, as in the case of other funds, while the low operating costs are not highlighted.

The minimum investment in Franklin India Index Fund is Rs 2000. This means that investors can buy the 50-stock S&P CNX Nifty, which has a market capitalisation of over Rs 3500 billion, for as low as Rs 2000! Ideally, an index should be fully invested at all times since a cash component is a drag on returns. However, FIIF will keep around 5 per cent in cash to meet redemption. Besides, the fund carries a lock-in of 30 days on all investments since the settlement cycle takes around a fortnight to complete. This means that if the fund were to sell a stock today, it would receive money only after a fortnight.

So, should one invest in index funds? As has been said, an index fund is probably the best investment vehicle for an investor who plans to invest in a portfolio of blue chip scrips. Based on the current composition of NSE-50, technology stocks account for more than 25 per cent of NSE-50. With the index holding the best technology companies with long-term growth potential, your index fund has the potential to deliver reasonable returns in the long-term.

On the other hand, the diversified nature of the index will keep the volatility of technology stocks under check. Just to see how your index fund guards against a drop in markets, consider this. In the six months ended June 30, while the category of diversified equity funds has lost 12.54 per cent, IDBI Index I' Nit, which tracks Nifty, has lost only 1.08 per cent.

Issue closes on: July 13, 2000
Minimum investment: Rs 2000
Entry load: 1% in the IPO

Mutual Funds - IPO

Tell us what you think of this feature