Types of Index Funds

There are 25 index funds, of which 9 funds track the BSE Sensex, 14 funds track the S&P Nifty, 1 fund tracks the CNX Nifty Junior and 1 tracks the CNX Bank Index.

Types of Index Funds

There are two kinds of index funds:

1. Passive index funds.
2. Active index funds.

Index funds offer passive investment management strategy where the fund house simply invests the monies collected into stocks forming a particular index in the same proportion that the stocks constitute the index. This ‘Auto Investment’ route has yielded decent results.

Passive Index funds

These funds are invested in stocks forming the index they track, in the same proportion as they constitute the index. For instance, if an index fund is tracking the BSE Sensex, where company XYZ forms 10% of the Sensex, the fund will invest the same percentage of the funds it collects from its investors in company XYZ. In other words, these funds don’t rely on the investment skills of a fund manager. When the index tracked rises, investor’s investment value will rise proportionately and vice versa.

Active Index Funds

These are index funds which invest most of their funds in stocks forming the index in the same proportion as they comprise the index. However, they invest a small portion of their funds in stocks which don’t form part of the index, in order to try to deliver better returns. This portion is actively traded on the stock exchange resulting in higher trading expenses incurred by the fund. Fund houses usually add the word ‘plus’ to the names of these funds – for instance, HDFC Mutual Fund calls its active index fund ‘HDFC Index fund – Sensex Plus Plan’ while ING Vysya Mutual Fund calla its active index fund ‘ING Vysya Nifty Plus Fund.

Active or Passive

In case of an active index fund, the portion of funds which are invested in stocks not forming part of the index tracked, are selected and managed actively by the fund manager. The returns generated by this portion of the funds are purely based on the fund manager’s investment skills just like in case of diversified equity funds. There are only 3 active index funds. The rest are all passive index funds, which faithfully track the index selected.