Following changes take place in Nifty from Oct 01 2010 — ABB, Unitech and Idea Go Out. Bajaj, Dr Reddy and Sesa Goa come in.
What is Index Fund
An index fund is a a mutual fund which tries to replicate an index of a financial market. (For eg: Sensex or Nifty). An Index fund follows a passive investing strategy called indexing. It builds a portfolio with the same stocks in the same proportions as the index. The fund makes no effort to beat the index. The purpose of the Index Fund is to earn the same return as the index over a period of time.
What is ETF
ETF stands for Exchange Traded Funds — these are funds that trade on the stock exchange just like any stock. And they are stored in yuor Demat Account just like any Shares you purchase.
Why are Index Funds/ETF’s not as popular or not advertised like other Mutual Funds ?
Expert Professionals / AMC’s don’t make enough fees from them, so they often go ignored. Just like Term insurance….. , Term Insurance is not promoted as much. Insurance companies do not benefit from them (You can see the correlation…., What is good for Investors and also available for cheap, is not often promoted enough. Because it does not pocket enough profits for the providers/agents…….)
What is the basic difference between Index Funds/ ETF’s and Mutual Funds?
Mutual Funds try to beat the index over a period of time. This is active investing. Fund Managers are paid to beat the index over a period of time by generating alpha (The excess return of the fund relative to the return of the benchmark index is a fund’s alpha.).
Index Funds/ ETF’s on the other hand, try to mirror the index returns. This is known as passive investing.
What is the advantage of Index Funds/ ETF’s over Mutual Funds?
– Much Lower Expense Ratios (AMC’s are much lower)
– More Flexible
– Approximately 60%-80% of equity mutual funds underperform the average return of the stock market over a period of time. This is the price of “active management”.
– On top of this the AMC charges 2-2.5% of the portfolio value annually.
So , you have to pick the funds carefully. This becomes just like picking Individual Stocks. Of course, if you pick up the right funds (or for that matter right stocks) , then you would be beating the Index handsomely. However this process requires good amount of time, effort and judgement on your part. It sounds simple but is not easy.
– On the other hand , investing in index funds in the beginning , you can start participating in the capital markets and once you have a substantial base, then you can start exploring “active” investing options.
The writeup on Types of Investors will get you to understand more about different kinds of investors.
SIP or Systematic Investment Planning is a concept. It means that you periodically invest your money. It inculcates discipline, takes out the emotional part of decision making and allows you to seamlessly participate in investing.
However, many people associate or assume that Sipping is available only with Mutual Funds. Thereby, they miss the whole essence of what SIP is all about. Indeed, mutual funds offer automatic withdrawals from your bank account to be invested in Mutual funds. And they promote SIP (albeit, not aggressively, you see, they want you to make the payments upfront and not by SIP).
However, it is to be noted that SIP is a concept and can be applied while purchasing shares or equity as well. Yes, you heard me right, you can SIP in stocks.
There are many cases, when you would want to SIP in equities like – (a) You want to build your own portfolio of stocks with a tilt towards a particular sector (b) You are a Buy-and-Hold type of Investor (c) You are interested in investing in good Dividend Yielding Stocks (d) You do not want to incur the annual AMC charges in the range of 1.75 -2.5% on your portfolio value year after year which all the actively managed Mutual Funds charge. Check this post. (e) You are interested in investing in ETF’s (Exchange Traded Funds) etc.
There could be ‘n’ number of reasons where you are interested in investing in stocks. Once you have made up your mind that you want to invest in equities, you can go about doing a Systematic Investment Plan for your equity investment.
10 Steps to SIP in Stocks :
1. Decide on the intervals (or periods) in which you would like to SIP. eg: Monthly 25th of every month
2. Decide on the periodic SIP amount you would like to invest e.g.: Rs 14,000/- every month
3. Use a Calendar to set reminders. (I am a google addict You can use google calendar) or use whatever means (Physical Calendar, tell your wife etc.)so that you will receive a reminder call about the periodic investment. And you can set aside the funds to be allocated for investments.
5. Decide the amount to be allocated to each asset e.g.: Rs 2,000/- each.
6. And that’s it you are all set to start sipping. Execute the Plan. Once you get a reminder Just go ahead and buy the assets.
7. Do a periodic review of your purchases every quarter in order to assess the performance.
8. Have a performance yardstick. Aim for good returns (Hey, there is no harm for trying to beat the index by a couple of percentage points year on year).
9. Measure your performance against the returns. Review.
10. Apart from TIME-WISE SIP, you can also go a step ahead. You can also do a PRICE-WISE SIP as well intelligently. If there is a > 10% drop in price of a stock between your two planned purchases, you can go ahead and pick up the stock and skip the next installment of that particular stock.
Eg: You pick up Rs 2000/- worth of Cairn India @ Rs 200/- on 25-Jan-2010. You have plan of picking up Rs2000/- worth of Cairn India on 25-Feb-2010. However , if Cairn India were to drop by > 10% or more in Jan itself , then go ahead and pick up in the stock in Jan and skip the Feb-2010 installment.
There are many Index ETF’s which are available and which are a good, low cost alternative to mutual funds which you can (or rather should) avail.
Understand what type of Investor you are, if You are the Saver Kind of Investor, go ahead SIP in Stocks. Step-by-Step over a period of time you would have created a portfolio of stocks which will generate income for you in form of dividends and which will also appreciate with time to generate wealth over a period of time.