What is an Indexed Mutual Fund and when should you buy it?

Shubhojit Chatterjee asks “Can you please help us to know how to trade in Sensex as we are trading through ICICI Direct and they don’t have access to NSE”.

First lets review what an indexed mutual fund is. Indexed funds are an investment vehicle that aims to replicate movements of an index of a financial market such as NSE or BSE. For Indian investors that means a fund that will do as well or as poorly as the SENSEX or Nifty. These indexed funds will own all the securities of that index. So, for SENSEX index fund that means owning shares in all 30 companies that make up the index. Its usually a computer model that drives this fund not human stock picking. This also means lower management costs and fees because its mostly automated.

For the Indian market however the indices are fairly narrow so you dont actually get to capture the broad market, but a basket of stocks. (Editorial note: you would have done well though in the last 9 months!).

 Here is a list of (maybe not complete) of Index funds that track the SENSEX:

1. HDFC funds

2. Franklin India BSE Sensex Fund & Nifty fund

3. Tata SENSEX fund

4. LIC MF Index Fund SENSEX & Nifty

5. UTI Master Index plan

Over the past few years funds that tracked Nifty have had a better risk / reward return (beta) than those that tracked SENSEX, since the Sensex is more volatile, and most funds that track the Sensex dont do as good a job as those that do Nifty.