Here are some of the Top Performing Index Funds for 2017 that will give you higher risk-adjusted returns:
Investing demands a lot of emotional indulgences. It can make you go crazy tracking the financial developments. Especially to beat the market, you need to be ahead of the rest. If staying on top of your investments is giving you a nightmare, try Index Funds. They would help you to overcome the hangovers of active investing.
Index Funds are simple and work mechanically even while you are asleep. Particularly, those who lack the time and understanding about markets, index funds can be a boon. These funds don’t beat the market but emulate the movements of the underlying index. So, you may say that it doesn’t require fund manager’s brains to function. It’s more like a closed system wherein you need to give input of funds only once. Afterwards, the returns keep generating automatically.
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Consequently, you may not be able to outperform the market. Well, that’s the opportunity cost of mimicking the markets.
Let’s have a deeper look at Index Funds first.
Index Funds are also known as Passively Managed Fund. These are a type of equity mutual funds that have a portfolio constructed to match the index say Sensex which it tracks. It replicates the stock selection and weights as per the benchmark. Moreover, it keeps adjusting the portfolio whenever the scrips are altered in the underlying index. For someone who is passionate about investing, Index Funds can be boring.
Unlike actively managed funds, Index Funds tend to be less intensive on research and investment strategy formulation. These can do away with expensive analysts and researchers. The fund manager doesn’t actively churn the portfolio. It may be perceived as a buy and hold fund in real terms. So, you get a massive market exposure with relatively low portfolio turnover. These funds are, thus, cost-effective on account of lower fund management fee and low transaction costs. The same is reflected in their above-average returns. These are very liquid and require little emotional involvement from your end.
Index Funds vs. ETFs – A Comparison
As a prudent investor, you need to know the key differentiators between Index Funds & ETFs to make an informed decision.
Accessibility
ETFs, as their name goes, are listed and traded on the exchange just like stocks. You may freely buy or sell these only through the exchange. Additionally, you will require a Demat account and a share trading account to invest in ETFs.
Index funds, on the other hand, are very much like other mutual fund schemes. Units of Index funds are neither listed nor traded on stock exchanges. You may only buy or redeem the units directly from the fund house.
Cost
ETFs provide you with the flexibility of stock investment and the simplicity of equity mutual funds. In addition to fund management fee, these attract brokerage at the time of conducting transactions of buying and selling stocks. Owing to its unique structure and investment mechanism, the ETFs have much lower expense ratios as compared to index funds.
On the contrary, Index funds charge an annual management fee. The fee includes brokerage, operating expenses, fund management charges, etc. For regular plans, the expense ratio will be higher than direct plans. Such a recurring expense can be avoided in case of direct plans. The expense ratio for most of the Index funds may fall within 1 percent, which is deductible every year. A higher expense ratio may cut into your profit margins.
Liquidity
Although ETFs are traded on stock exchanges, there’s catch on the liquidity front. It may happen that there are no takers of your stocks. You may be compelled for a selloff to meet emergency cash needs.
Such issues won’t crop up in the case of Index funds. These are highly liquid and flexible investments. Whenever you are in requirement of funds, you may redeem your units even without an exit load.
Disclosures
The prices of ETFs are available ‘Live’ / ‘Real-time’ on the stock exchanges. Conversely, the NAV of index funds is determined at the end of the trading day.
Also read: Best-performing Arbitrage Funds for 2017
Returns
Both the ETFs as well as Index Funds are meant to mimic the underlying index. Ideally, they should yield returns equivalent to the index. But that’s not the reality.
As the ETFs are traded on market prices in real time, the chances of deviation in returns are far less than Index funds whose NAV are disclosed at the time of the closing of the market.
In addition to this, Index Funds have this mandate to stack up some portion of their assets as cash to meet redemption requests from investors. Top that up with the higher expense ratio.
So, the anomalies of Index Funds are good enough to dent your profit margins as compared to ETFs. Hence, ETFs are found to generate returns analogous to the index as compared to Index Funds.
Top Performing Index Funds for 2017
Selecting the right Index fund is all you need to maximise your returns. Along with qualitative factors like fund history, you need to probe other quantitative factors as well. The table below shows the top picks of the season based on in-depth analysis of risk-return factors.
IDFC Nifty Fund looks the best bet regarding risk-adjusted returns, consistency and alpha. It has given consistently higher returns across time horizons with a lower expense ratio. UTI Nifty Index Fund stands to be the next best investments amongst the five. It has the second highest returns, lowest expense ratio, lowest volatility and highest Sharpe ratio.
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Final Words
Whether to go for ETF or an Index Fund, always remains a big question. Both are good on different counts. While going for ETFs, choose the one that won’t give you problems upon liquidation. In the case of Index Funds, go for that which has a lower expense ratio. It would thus yield higher returns.
