The Hindu Business Line : Index funds yet to catch on

THE truth is out: Six years after the first scheme was launched in India, index funds are nobody's children, with not more than a few players even thinking about promoting them seriously.

And the Indian market for index funds stands in stark contrast to some of the markets that actively support, research and indeed fete these products.

Diversified, actively-managed equity funds remain the cynosure of all eyes. Marketing departments of asset management companies push them hard - with statistics packed in colourful leaflets - even as distributors and financial planners strongly recommend them to their clients. In the melee, the case for index funds gets lost.

Lost forever? Apparently not, given what some of the pillars of the industry are saying about index-based investing.

Mr Ved Prakash Chaturvedi, Managing Director of Tata MF, notes that passive management has its merits too, although these are being crowded out by the advantages of active strategies.

"We all understand that index products can assume far greater significance. At the same time, we feel this may not happen overnight," he stated.

Index funds can be efficient diversifiers, argues Mr Sanjay Sachdev, CEO of Principal MF, the fund house that started the country's first scheme based on the S&P CNX Nifty.

"But the market still listens more attentively when we talk about growth through active management," he observed.

The MF industry is well aware of the strengths of these funds, said Mr Pankaj Razdan, MD of Prudential ICICI MF. "Low cost operations are a big plus point... it (index funds as a genre) is one of the biggest draws in larger markets like the US," he added.

The realities for India are not encouraging, evident from a few facts about index funds that may be mentioned here. The two largest schemes in this category, UTI Sunder and UTI Master Index, manage only a shade over Rs 200 crore each. Such a tally is small when compared to many of the broad-based schemes. And the smallest funds in this lot, mostly Sensex trackers, are all below the Rs 10-crore mark (as on May 31, 2004).

Assets, clearly, are not their forte. As for performance, the oldest entity, UTI Master Index, has delivered 6.77 per cent since its launch in June 1998. It is not that all players - there are over 30 and a couple of more are expected to arrive - have introduced these options.

Recent entrants such as HSBC MF and Deutsche MF have not launched them at all. Some of the older AMCs like Alliance Capital have also stayed off index funds.

The situation, indicate distributors, is potentially damaging for the investing populace. "Index investing is yet to become a habit for the average Indian investor," says Mr Rajiv Bajaj, Managing Director of Bajaj Capital, a leading intermediary. Since fund houses are not active on this front, not every one is aware of the merits of these offerings, it is felt.

Index tracking is a mammoth affair internationally, courtesy the many professional investors who follow multiple indices. While the global canvas is quite wide on this count, the scenario in India is largely limited to the Nifty and the Sensex.

The newly-established Benchmark MF, which has worked out several plans with regard to ETFs (exchange-traded funds), is about the only exception. Birla Sun Life MF has also introduced a bond index product.

Local investors, some quarters believe, will not accept index products as they are generally in favour of active strategies that facilitate capital appreciation. As the Association of Mutual Funds in India feels, the time for index funds has probably not arrived in India. "It is a milestone that the (asset management) industry is yet to cross," said Mr A.P. Kurian, Chairman of AMFI.

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