Is it now difficult to judge an index fund by its cover?

If you had invested in an index fund a year or even three years ago, and are thinking that you've lost as much as the Sensex or Nifty did, chances are you've lost much more than you broader benchmark index. That's because many index fund managers continue to defer from their investment objectives. So, is it getting difficult to judge an index fund by its cover?

As per Sebi rules, index funds should replicate the portfolio of a particular index and should invest in securities in the same weightage comprising the index. It states that the net asset value of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as tracking error in technical terms. Necessary disclosures in this regard should be made in the offer document of the mutual fund scheme. It may be noted that index funds are passively managed schemes, and are not an active Index fund.

The offer documents state that funds will not have tracking error of more than 2%. So, in which schemes figure does the tracking error limit extend beyond 2%?

Schemes                  Returns            Tracking error

LIC MF Sensex             -7.63%             8.61%

LIC MF Nifty                 -3.28%             6.76%

HDFC Nifty                   -6.48%             4.22%

CanRobecco Nifty         -0.26%             3.9%

HDFC Sensex              -7.07%             2.96%

Magnum Index             -3.21%             2.69%

Birla Sun Life Index       1.5%             3.1%

It may be noted that in the period under review, the Nifty has delivered a return of 1.31%, while the Sensex has posted a negative return of 2.2%.

On a three-year basis:

Schemes                  Return            Tracking error

LIC MF Sensex             17.93%            7.5%

LIC MF Nifty                 15.51%            7.49%

CanRobecco Nifty         22.5%             4.26%

Magnum Index             21.25%           3.89%

Birla Sun Life               22.69%           2.94%

HDFC Nifty                 19.77%           2.88%

HDFC Sensex             20.71%          2.54%

Also, the weightage of shares, in percentage terms, across schemes differ. For instance, the weightage of Reliance Industries in the Sensex is 15.4% while that of ONGC is 9.92%. However, the weightage of RIL and ONGC in LIC Mutual Fund Sensex is 16.44% and 3.76%, while in HDFC Sensex it is 16.13% and 3.7% respectively.

Similarly, the weightage of SBI and Infosys on the Nifty is 3.61% and 3.57%, respectively. However, the weightage of SBI and Infosys in LIC MF Nifty is 2.82% and 4%, HDFC Nifty 2.81% and 3.96%, CanRobecco Nifty 2.84% and 4.01%, Magnum Index 2.99% and 3.59%, and Birla Sun Life 2.24% and 3.17% respectively.

Mutual funds on an average invest 90-95% in index stocks, while cash holding is 5-10%. However, in the case of Birla Sun Life Index and Magnum Index the fund cash level is 22.51% and 11.92%, respectively.

By Pooja Meswani, CNBC-TV18

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