I have an investible surplus of Rs 2 lakh. My financial planner tells me to put it in index funds or exchange-traded funds. What is the difference between the two? Is it a good idea to put my entire money in these schemes?
An index fund is a passively-managed fund. It seeks to track the performance of an underlying benchmark index, such as the Bombay Stock Exchange’s Sensex or S&P CNX Nifty. The advantage: An investor is aware of the stocks as well as their proportion in the portfolio. For an individual investor, it is practically impossible to create a portfolio matching an index. However, the downside of such schemes is that the investor tends to lose out on the above-average returns a quality equity diversified fund can earn over a longer period of time.
An exchange-traded fund (ETF) is a hybrid product combining the features of an index fund as well as stocks. These funds are listed on stock exchanges and their prices are linked to the underlying index. ETFs can be bought and sold like stocks on an exchange. In other words, ETFs can be bought or sold any time during market hours at prices that are expected to be closer to the net asset value (NAV) at the end of the day. Therefore, one can invest at real-time prices as against the end-of-the-day prices in case of open-ended schemes. There is no paper work involved for investing in ETFs.
These funds can be an ideal option for new as well as passive investors, as they offer an opportunity to earn returns without having to worry about diversification and portfolio quality. Besides, they are transparent and cost-efficient compared to actively-managed equity funds. Therefore, you can begin your tryst with equities through these funds.
With telecom companies likely to get 3G licences soon, do you think it makes sense to purchase some top-of-the-line telecom stocks? Is there a mutual fund scheme with good exposure to such stocks?
The launch of 3G services is expected to act as a major growth driver for the telecom industry because it will allow companies to offer a host of data-enabled services. Besides, the telecom industry is likely to benefit from a gradual shift in the economic dynamics. Also, the possible re-rating of the sector’s stocks after underperformance in 2009 makes them good candidates for investment. However, there are concerns about high debt levels of telecom companies, uncertain valuations of 3G licences and the likely time lag for their roll out. Hence, one needs to consider buying telecom stocks from a long-term perspective. While many diversified and thematic funds have moderate to high level of exposure to telecom stocks, there is only one fund that invests exclusively in telecom stocks—JM Telecom Sector fund.
The writer is CEO of Wiseinvest Advisors.
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