INDEX FUNDS & ITS EFFECTS ON INDIAN ECONOMY

Ranvir Gautam

Rituparna Banerjee

Saikat Neogi

Sayoni Ghosh

WHAT IS INDEX FUND?Index fund is a mutual fund or exchange traded fund that aims

to replicate the movements of an index of a specific financial market. It follows a passive investing strategy called indexing.

For example, it involves tracking an index like the sensex or the nifty and builds a portfolio with the same stock and with the same proportions as the index. The funds make no effort to beat the index and in fact it tries to earn the same return.

INDEX FUND IN INDIAN CONTEXT• In the Indian market scenario index funds may not be the

best option. The basic principle of indexing is - the more the number of stocks comprising an index the better is the diversification and price discovery. Indian indices like the Sensex (30) and the Nifty (50) cover a relatively small number of stocks and ignore many opportunities in the mid-cap sector.

• Unlike the capital markets in developed countries, Indian markets haven't been thoroughly researched and there is enormous scope to beat the market by sound research.

ADVANTAGES As per efficient market concepts index funds provide

optimum return in the long run.

An index fund does not have to pay for expensive analysts and frequent trading.

Index fund has a broad index which is less volatile than the specific stock or sectors, thereby lessening risks for investors.

Index funds are tax friendly so a substantial tax savings can be earned.

DISADVANTAGES

Possible tracking error from index Since index funds aim to match market returns, both under-

and over-performance compared to the market is considered a "tracking error“ by holding too much cash.

Cannot outperform the target index Index fund seeks to match rather than outperform the target

index. Therefore, a good index fund with low tracking error will not generally outperform the index, but rather produces a rate of return similar to the index minus fund costs.

Index composition changes reduce return Whenever an index changes, the fund is faced with the

prospect of selling all the stock that has been removed from the index, and purchasing the stock that was added to the index.

HOW ARE INDEX FUNDS TRADED? While trading in index funds offers broad

market exposure, it involves low operating expenses. The reason for low expense ratio is because most index funds are not actively managed. This type of model is called passive fund management.

Index funds are based on a theory known as the efficient market hypothesis (EFH). This theory states that as stocks are valued with accuracy, it is not possible to beat the market easily.

FEATURES OF PLANS Nifty Plan:

To generate returns that are commensurate with the performance of the Nifty, subject to tracking errors.

SENSEX Plan:

To generate returns that are commensurate with the performance of the SENSEX, subject to tracking errors.

SENSEX Plus Plan:

To invest 80 to 90% of the net assets of the Plan in companies whose securities are included in SENSEX and between 10% & 20% of the net assets in companies.

INITIAL ISSUE EXPENSESThe initial issue expenses scheme will be borne by the AMC. In respect of each purchase / switch - in of Units, upto and including Rs. 5 lakh in value, an Exit Load of 1% is payable if Units are redeemed / switched-out within 1 year from the date of allotment. In respect of each purchase / switch - in of Units, greater than Rs. 5 lakh in value, no Exit Load shall be payable.

These are collected from the HDFC bank.

LIQUIDITY OF THE SCHEME

The Scheme will offer for Sale and Repurchase Units at NAV based prices on every Business

Day on an ongoing basis, commencing not later than 30 days from the closure of Initial Offer

Period. Under normal circumstances, the Mutual Fund will Endeavour to dispatch the Redemption

Cheque / draft within 3 Business Days from the acceptance of the Redemption request.

INITIAL OFFER PRICE OF THE SCHEME

Rs. l per Unit for cash at par (The face value of the Units will be based on the closing value of the respective indices as at the Date of Allotment in the proportion : 100 Units = Value of the Index)

Target Amount Index Fund seeks to raise minimum

subscription amount of Rs. 1 lakh under each Plan

ASSETS AND DETERMINATION OF SCHEME

Once a Stock Exchange has been selected for valuation of a particular security reasons for change of the exchange shall be recorded in writing by the AMC.

When a security is not traded on any stock exchange on a particular valuation day, the value at which it was traded on the selected stock exchange, on the earliest previous day such date is not more then 30 days prior to valuation date.

When a debt security is not traded on any stock exchange on a particular valuation day, the value at which it was traded on the principal stock exchange or any other stock exchange, on the earliest previous day such date is not more than 15 days prior to valuation date.

PIE CHART SHOWING MARKET SHARE

22%

25%36%

6% 11%

Market Share

Shares Mutual Fund BondsIndex Fund ULIPS

FREQUENTLY ASKED QUESTIONS BY PEOPLE

What is an index fund what's the difference between an index

fund and equity fund? How do I start placing money in an

index fund? How easy is it to start an index fund? If not index fund then what are they

interested in?

Index fund: Investment fund designed to match the returns on a stock market index. Mutual fund whose portfolio matches an index.

These types of funds have a certain investing philosophy they have to follow that can be found in the funds prospectus. They are also typically actively managed which means that a fund manager or managers actively buy and sell inside the fund to try to beat the performance of the indexes

. Buy shares in an index fund. (ex. Vanguard 500 Index Fund, tracks S&P 500)2. Buy shares in a ETF. (ex SPY, tracks S&P 500)In practice, these two ways are very similar. The difference is that index funds usually have no transaction costs for buying/selling, but can only be bought through certain authorized brokers and might charge a fee if you have a low account balance. ETFs are traded on the stock market and can be bought through *any* brokerage (ex. etrade), but you will almost certainly be charged a fee for buying/selling.

First step would be to register with the SEC as an investment company. As an investment company you would be required to meet specific reporting and information guidelines mandated by the

QUESTIONS ASKED TO:

NAME OCCUPATION INVESTMENT

R.K.Neogi Service Index

Prosenjit Sen Engineer Equity

Sumit Agarwal Business Mutual fund

Prasant Khanna Business Bond

Sumanta Ray Teacher Equity

Ramakant Jha Student Equity

S.N.Singh Doctor Bond

Ramesh Mehra Business Index

Sunil Prasad Student Equity

R.G.Singh student Bond

LEARNING

Understanding different investment schemes.

Knowing in details about index funding.

Gaining practical knowledge about share market.

Contribution of banking sector in other financial sector.

SOURCES

• Financial analyst of HDFC bank, RDC, Rajnagar.• Websites: - www.hdfcbanks.com - www.index-fund.html - www.investowords.com• Magazine- Asset management