Less than 10 percent of the Indian population invest in the stock market. A lot of these investors are classified as retail investors and most of them invest through various themes of mutual funds. Over the years, many have also started doing systematic investment programs, which literally means a little amount put away regularly as investment in mutual funds.
Quite a few remain invested and benefit from the liquidity power of the stock market as well as compounding of investment.
Although the SIP mutual fund is a good method, it still leaves the investor exposed to the risks of the theme and the timing itself.
There is one more option to the benefit of the investors. This option costs considerably less because it does not have the cost of management as a mutual fund does. This is an Exchange Traded Fund, also called an ETF.
What is an Exchange Traded Fund? An Exchange Traded Fund is a fund that invests in all the stocks that form the index and in the same proportion as that of the weightage of the stocks, in the underlying index. How does this help? This kind of investing helps in managing the risk as that of the index without the risk of selection and timing. So what is an index? An index is a set of stocks that put together becomes the benchmark for a particular section of the market. The simplest example of an index would be the Nifty 50. The Nifty 50 simply put is a combination of all the 50 stocks that comprise the Nifty index. The index gives the broad trend of the market. Therefore, investing in the index is called benchmark investing or passive investing.
Index funds with their low cost of operations, produce a steady risk weighted additional return compared to a mutual fund. In addition the Index produces appreciation.In a long term bull market with fluctuations, Index investing when combined with Systematic Investment Plan produces neat risk weighted return that betters mutual fund returns Does the sound too technical?
A look at the table below will tell us the story:
Compounding effect of a benchmark ETF in a Systematic Investment Plan Mode.
A modest Rs. 1000 per month investment in stocks which mirror the BSE sensex would have had the effect of cumulating to Rs. 14,153/-. A low risk ROI of 17.94 percent p.a in absolute terms or 34 percent p.a in terms of IRR.
The author, Aditya Sesh, is Founder and Managing Director at Basiz Fund Service Pvt Ltd. The views expressed are personal
First Published: IST