Index Funds mirror the holdings in the index and follow the weightage as reflected in the index. Say if the Index fund is a Sensex Index fund, it would invest in the 30 stocks which represents the index at the same weightage as per the index.
Large Cap Mutual funds as per the categorization of SEBI can invest into Top 100 companies (by market capitalization) listed on the stock exchange.
The above graphic shows the 10 Rolling returns of Sensex and select Large-cap funds.
The probability of return greater than 8% is about 95% with the funds listed above (managed by Fund Managers) against a 64% chance of return being greater than 8% by the Index fund.
Indian stock markets still have the in-efficiency of information which can be effectively used by the Fund Managers in creating Alpha. The Index funds would be a better option in a well-developed market which is most efficient in information availability to all the market participants. In India, Fund Managers still can create Alpha.
Investors would be better placed to create additional returns by choosing to invest with active Fund Managers compared to investing into Index Funds.
Do consult your Investment Advisor on the suitability of investment before making the investment decision be it in ab Index fund or actively managed funds.
Happy Investing…
