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Why Investing in an Index Funds Make Sense
Why do you invest in an equity mutual fund? The answer might be quite obvious at first, but certainly deserves deeper thought. One may invest to take advantage of the higher returns that equities are supposed to give over the long run. But if that is the only motive, than why not invest in an index fund?
An index funds, for the uninitiated, mimics the returns of an index like the Nifty or the Sensex. Thus there is no individual stock picking involved. Only a formula based mechanical criteria which decides the inclusion of stocks in an index.
Plus they come with the huge benefit of lower costs when compared to actively managed funds.
But wait a minute! Wouldn't you want to take advantage of a smart and savvy fund manager who would pick stocks in such a way so as to get you higher returns than a mere passively managed index fund? If that's why you invest in mutual funds, think again.
According to the newly launched S&P Crisil Indices versus Active Fund (SPIVA) scorecard for the Indian mutual fund industry, 70% of large cap funds in India underperformed the S&P CNX Nifty Index. Further, 40% of the funds in the diversified equity category underperformed the S&P CNX 500 Index over a 5-year period ended Dec 2009.
Indeed, in the world of investing, a greater intellect does not necessarily mean a better investing performance |
