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Index funds – Passivity pays off

Oct 25, 2000

When the markets are volatile, it can be a Herculean task trying to outperform it. That’s where index funds with their passive investing philosophy can make a difference. Ask any active fund manager and he will tell you how difficult it can be to keep investors happy in a falling market. And the way stocks are falling right now, active fund managers are happy just to outperform the index, even if they post a negative growth overall.

Open-ended, Growth Funds NAV
BSE- 30 - -2.9% -10.2% -24.3% -
S&P CNX Nifty - -2.5% -10.4% -20.1% -
Canbonus 8.7 -3.0% -9.1% -36.8% 0.7%
Primary Equity Fund 13.7 -3.1% -8.5% -21.8% 5.7%
Magnum Equity Fund 12.1 -3.1% -10.1% -18.1% 13.4%
K P Prima Fund (Gr) 18.9 -3.3% -10.8% -29.6% 9.8%
DSP ML Equity Fund 15.1 -3.4% -8.8% -22.7% 20.5%
Magnum Global Fund 9.4 -3.6% -9.8% -26.7% 0.6%
Mastergain 1992 9.7 -3.7% -9.3% -31.5% 1.2%
ING Growth (Gr) 13.9 -3.9% -14.6% 5.9% 27.3%
Grandmaster 1993 8.7 -4.0% -10.8% -39.9% -3.0%
GIC Growth Plus II 12.5 -6.6% -18.8% -16.9% 5.0%
K MNC 8.4 -8.2% -18.1% 0.0% -10.7%

As is evident from the table, diversified growth funds have struggled to beat the indices over the week and over the year.

Open-ended, Index Funds NAV
UTI Nifty Index 6.9 -2.5% -9.4% 0.0% -26.6%
Franklin India Index Fund (Nifty) 8.7 -2.6% -9.3% 0.0% -12.1%
Index I-NIT 1999 (Nifty) 8.8 -3.6% -9.6% -20.6% -12.2%
UTI Master Index (BSE - 30) 10.9 -3.0% -9.7% -27.9% 9.4%

On the other hand however, the performance of index funds, has mirrored that of the indices, after factoring the tracking error inherent in index funds. This is mainly because index funds are meant to do just that – mirror the index.

So while both active and passive fund management benefit in time of market euphoria, it is generally passive fund management that comes out tops in a falling market.

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