Index Funds

Why Index fund-the reasons are best summarized by what John Bogle the founder of Vanguard and creator of the first Index Fund has said, "maximum diversification, minimal cost, and maximum tax efficiency, lower turnover (trading) and low turnover cost and no sales loads.’

In developed markets Index funds are very popular and attract more investment than equity MFs. That’s because most MFs there are not able to beat Index funds to justify the high costs. But what about in India. Already in large cap MFs are finding it very difficult to beat the benchmark index especially over longer periods and on a rolling returns basis. However, in other cap many MF deliver significantly higher returns than their benchmark index. But it is not as rosy at it is made out to be.

Most comparisons are not entirely apple to apple. Two main reasons: One MF returns include reinvestment of dividend income while the benchmark index does not- a possible impact of 2%. Second and more importantly this is not a comparison of risk-adjusted returns. After adjusted for these, there will be a few MFs that are worth investing in and we will recommend those. However, to get the full benefits we will need to be invested till the theme plays out.

Omega will recommend investment in Index Funds when there is still some money to be allocated to equity after investing in available opportunities in Direct Stocks and the select MFs. Also we compare risk adjusted returns of various assets and recommend rebalancing to always hold the one that is the best. Omega being objective will recommend Index funds when it makes sense.