Saturday, January 27, 2007

Index funds beat stock pickers

While the index fund has given a one-year return of 42%, diversified equity schemes could only come up with 34% returns. Ditto for tax planning schemes, traditionally strong performers, which are lagging the sensex with 30% annual returns. Only information technology sector funds performed better (52%) than the index funds.

However, that is no reason for fund mangers to rejoice as it is not their stock picking skills that propped up the returns, but the brilliant performance of the entire sector.

It is quite funny. These funds charge fund managing fee to actively manage the corpus to outdo the indices. But look at the result. I feel that I would have been better off with an index fund. I would have saved some expenses too.

Diversified equity funds usually have large expense ratios compared to index funds. For example, the expense ratio of Banking BeES, an index fund, is only 0.45, while it is anywhere between 2-2.50% for diversified equity schemes.

Index funds are simple to understand. They are transparent, as you know which are the stocks you are getting into. You are not dependent on the stock picking skills of the fund manager. It is also easy to measure the performance of these schemes.

Index funds are especially suited for those who don’t know much about the stock market and are investing for the first time.
Read more about ETFs here and here
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