At a time when the benchmark Sensex is down over 35 per cent from its all-time peak hit in January, L&T Mutual Fund has come out with two index funds - Nifty50 and Nifty Next50 - that will replicate the performance of the Nifty 50 and Nifty Next 50 indexes, respectively and will 'operate predominantly in the large cap space'. The New Fund Offer (NFO) opened today and will close on March 31.
An index fund is a low-cost passive investment vehicle that tracks an underlying index. Nifty50 index fund invests in 50 blue-chip companies that are part of the Nifty index, while Nifty Next50 invests whereas next 50 companies as per the market capitalisation. "This category is believed to be the stepping stone to become a part of Nifty 50 index," says L&T Mutual Fund.
Since the fund manager doesn't play an active role in selecting the stocks, the commission charges are lesser in index funds compared to active funds. These funds comprise the best stocks of the particular segment they represent. Now that the stock market has seen steep correction due to the rising spread of coronavirus and expected global recession, this could be the best time to invest in an index fund as history suggests each big crash is eventually followed by a robust recovery within medium to long term and rewards the patient investors.
"The mutual fund industry has always discussed on how one should invest more when the times are tough and less when times are euphoric. The markets today, with a steep correction since January 2020, provide an opportune platform for investors to invest in a well-diversified portfolio of fundamentally strong, highly liquid and well-known companies. First time investors can put aside their fear and anxiety of the markets and look at entering the market," says Kailash Kulkarni, Chief Executive, L&T Mutual Fund.
Meanwhile, all index funds presently are available with huge losses due to market meltdown because of coronavirus pandemic. "Negative returns may have psychological/emotional impact on investors not to subscribe to existing index funds. Since L&T index fund will be a new fund at badly beaten down valuations, it might attract investors sitting on fence with an opportunity to enter the markets," says Omkeshwar Singh, Head-Rank MF, Samco Securities.
However, before you go ahead with investing in L&T Mutual Fund, you must know two important parameters of zeroing in on an index fund - expense ratio and tracking error. "Since there are host of funds that track the respective indices, how efficiently they are able to track the underlying index is of importance," says Vijay Kuppa, Co-Founder, Orowealth.
"Expense ratio is another important metric to consider in a passive fund. If there are funds which efficiently track the index, then the expense ratio is the only key differentiator," he adds.
Since L&T Nifty50 and Nifty Next50 indexes are in the NFO stage, both the parameters won't be available as of now. That said, Kuppa of Orowealth advises that being an open-ended fund, investors can look into the fund post the launch as well when this information is available.
Singh advises to not only wait for the expense ratio but also for the markets to settle down from coronavirus pandemic before one invests in the index fund.