Mutual Funds: Ride the Benchmarks

Mutual Funds: Ride the Benchmarks
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At a time when there are concerns all around on the strength of the economy and future growth, it takes a lot of courage and conviction to trade in the markets even for seasoned investment managers. And when you are focusing on investments in lesser known and researched companies in the midcap segment, the risks are even higher.

So, why take these risks? The best course of action for investors in such times is to opt for large-sized, well established and high capitalized businesses that are better placed to weather economic downswings. To do this, you can opt to invest in large-cap or blue chip focused funds. But the still better option is to restrict your allocation to index funds, which track frontline stocks forming part of the S&P CNX Nifty or the BSE-Sensex. The advantage with index funds is that you won’t underperform the markets, even though you won’t outperform. What’s more important is that, all you need to have conviction about is the broad trend of the market and not the performance of individual companies. This saves a lot of time in managing your investments. All you need to do is keep an eye on the index to know how your money is working.

What’s more, any adjustments and changes in underlying stocks made in the index will require your fund to make the same revisions, thus keeping you aligned with the market shifts. And since any such index realignments are done based on a very clear set of criteria, there is little room for any subjectivity to influence your returns.

The one thing you need to be careful about when investing in an index fund is the tracking error. This refers to the variance between the scheme and index performance. The lower the variance, the less the tracking error. A low tracking error ensures your investment returns more closely mirror the performance of the index.

The indices also ensure adequate diversification with the leading indices Nifty and Sensex comprising of 50 and 30 stocks, respectively. These stocks are also all very liquid and frequently traded, ensuring that even in a downturn, portfolio liquidation should not pose a challenge.

So, if you believe in the India longterm economic story, this is a good time as any to start accumulating units of index funds. If you wish, you could even opt for an SIP of an index fund. This will help you average your acquisition cost while building your corpus with an eye on Nifty @ 20,000!

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