Weekend Bytes
How can you use Index Funds to help create wealth?
Index Funds are passive mutual fund schemes which aim to replicate the performance of an underlying index. eg. Nifty 50, BSE Sensex etc. They help in wealth creation by enabling investors to earn index-linked returns (subject to tracking errors) at relatively low cost.
Broad economic growth helps companies from different economic sectors to increase their sales and profits. Thus, sustained economic growth can lead to healthy returns for equity indices over long time horizons and investors could capture these returns through a variety of equity index funds to help achieve their dreams of wealth creation:
1. Broad market
These index funds track indices which offer broad exposure to the India growth story and are diversified across stocks and sectors. For example, investors looking to invest in large companies with an established track record could consider the HDFC Index Fund – NIFTY 50 Plan, which provides exposure to the largest 50 companies listed in India. Alternatively, if investors seek broader exposure to the India growth story, they can consider the HDFC Nifty LargeMidcap 250 Index Fund which provides exposure to 250 large and midcap stocks across 20 sectors of the economy.
2. Sector / Thematic
If investors seek exposure to a particular sector eg. banks, IT companies, realty companies etc., then they can consider such index funds. Sectoral funds carry higher risk, thus one could take controlled exposure to such funds.
3. Smart Beta Funds
These funds aim to provide better risk-adjusted returns than broad market indices. They use factors like Momentum, Low Volatility, Quality, Value, Growth, Size etc. to build stock portfolios. For example, the HDFC Nifty100 Low Volatility 30 Index Fund invests in 30 largecap stocks which have exhibited relatively less volatility over the last 1 year. Alternatively, investors could consider the HDFC Nifty200 Momentum 30 Index Fund, which invests in top 30 stocks of the Nifty 200 based on their Normalized Momentum Score.
To get a sense of the scale of wealth creation which could be possible by investing in Index Funds, consider that Rs. 1 lakh invested in the HDFC Index Fund – NIFTY 50 Plan on the inception date of the fund on July 17, 2002 would have become ~Rs. 23.5 lakhs as of Sep 30, 2024. Thus, investors could have grown their initial capital by 23.5x over 22 years by remaining patiently invested. This is an opportune time to remember that ‘Sound Investment + Time + Patience = Wealth Creation’!
When choosing an Index Fund, investors must be mindful of Tracking Error (TE) and Tracking Difference (TD). These metrics are used to assess how closely an Index Fund is tracking its benchmark. Tracking Error is the annualized standard deviation of the difference in daily returns between the underlying index and the Index Fund NAV, based on past one year rolling data. Meanwhile, Tracking Difference is the annualized difference of daily returns between the index and the Index Fund NAV. Thus TD over a given period is = Index Fund CAGR (Compound Annual Growth Rate) – Benchmark CAGR. Our Index Fund TE and TDs are available on our website and AMFI website
- https://www.hdfcfund.com/statutory-disclosure/tracking-error
- https://www.amfiindia.com/research-information/other-data/tracking_errordata
Generally, a low TE and TD are preferable as it indicates the fund manager is tracking the underlying benchmark efficiently.
In conclusion, equity Index Funds offer investors a simple and effective way of participating in the India growth story. Investors can invest or redeem units in Index Funds at closing Net Asset Value (NAV), just like other mutual funds.
Similarly, they can also set up Systematic Investment Plans (SIP)/ Systematic Transfer Plans (STP) /Systematic Withdrawal Plans (SWP) etc. just like most other mutual funds. Thus, investors can use Index Funds to invest in a disciplined manner to achieve their goals of wealth creation!
For performance of other schemes managed by Nirman Morakhia and Arun Agarwal, please click here
*Investors should consult their financial advisers, if in doubt about whether the product is suitable for them.
# For latest Riskometer, investors may refer to the Monthly Portfolios disclosed on the website of the Fund viz. www.hdfcfund.com
