As Index Funds or passive funds are gaining popularity among Indian investors, Mutual Fund Companies launching so many Index Funds. Do we need all Index Funds?
Index funds represent an optimal and straightforward option for individuals looking to enter the equity market at a low cost. Their inherently low-cost structure eliminates the risk associated with underperformance by fund managers. In recent years, index funds, also known as passive funds, have seen a surge in popularity among Indian investors. In response to this growing trend, mutual fund companies are increasingly introducing a variety of index or passive funds. This development serves as a cautionary signal for investors.
Beware before investing in Index Funds in India!!
Recently NSE launched a separate website for passive funds purposes. You can check this NSE website HERE. According to this website’s data, the number of Equity Index Funds launched in the last year are 58 Funds. Overall Indices tracked by all the Index Funds are 147 (NSE and BSE).
Nifty comprises 18 broad-based indices, 19 sector indices, 41 thematic indices, and 42 strategy indices. Consequently, the National Stock Exchange (NSE) provides approximately 120 indices within the equity category alone. If we consider the presence of 43 mutual fund companies, and each were to introduce these 120 index funds, investors could potentially have access to over 5,000 index funds. Fortunately, we have not yet attained that level; however, the likelihood of reaching that threshold is imminent.
Investors often find themselves at a point of confusion regarding the selection of an appropriate Index Fund. This confusion arises from the fact that Mutual Fund Companies present their various offerings as NEED, crafting numerous narratives to persuade investors that these funds are also NEED for their financial well-being.
Many of these indices reflect hidden active funds that are not needed for our objectives. Nevertheless, they persist in offering these products because the additional investment from us, fueled by our confidence in their stories, ultimately serves their financial interests.
The financial industry often asserts that Index Funds or Passive Funds are suitable for novice investors. However, given the complexity and lack of clarity in these offerings, it is not only beginners who may find themselves perplexed; even seasoned equity investors are at risk of confusion, which significantly increases the likelihood of making errors.
For true passive fund investors who appreciate simplicity, investing in more than three or four funds is useless and could result in a cumbersome portfolio down the line. It is important to recognize that the low-cost nature of Index Funds or Passive Funds, along with their current popularity, does not necessitate that one should invest in every fund labeled as INDEX Funds.
Beware….If you are investing in more than 3-4 Index Funds, then you are SCAPEGOAT to Mutual Fund Companies’ hidden agenda.
