Index fund problems…

Invest in an index fund – they will outperfrom the active fund managers by a mile. This is quite a normal advise by many financial advisors – especially those who charge a fee for advising rather than a commission. Of course indexing has its advantages – one of the most important being you are not worried about fund manager competence or fund manager corruption.

However Index funds in India are still in the nascent stage and hence their charges are much closer to active funds and nowhere near the international fund mangement charges of an index fund – it is at least 10x the intenational charges.

One conversation I had with a fund manager a couple of years back (he was underperforming the sensex) was interesting. He said I know what I am doing and I will underperform the benchmark because I am underweight Reliance. His solution to me was simple – if you wish to match the sensex, apart from my fund buy Reliance Industries, Reliance communication and Bharti. This way your total returns will beat the sensex. He was saying “the structure and management of the indices leaves a lot of bad taste”. Now we see the weightage of RIL is at 17% in the sensex – and this is foolish from the index point of view!

So what do you do if your portfolio is indexed, you have Reliance (in all its avatars), you have invested in Unit liknked plans, you have some large cap equity funds?

Analyze your portfolio and arrive at scrip wise % age exposure to Reliance – if it is much more than what you want, sell your direct holdings in Reliance. If you are still not happy, buy puts on Reliance! There is very little that both the exchanges will do regarding this….so go right ahead and take care of your portfolio.

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One Response to “Index fund problems…”

  1. Simple fix to this problem. Any Fund House that intends to launch any equity fund must first demonstrate handling an index fund based on Nifty/Sensex with max mgmt fee of 0.05%, expense ratio of 0.25% & tracking error (wrt TRI) of 0.5%. This should make all the folks fall in line…

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