Index funds saw fourfold jump in flows in March amid market volatility

Last month, Index funds received inflows to the tune of Rs 2,076 crore, as against Rs 511 crore the previous month

Index funds — which track performances of widely traded indices, such as the Nifty and the Sensex — saw a fourfold jump in inflows in March.

Last month, such funds received inflows to the tune of Rs 2,076 crore, as against Rs 511 crore the previous month.

“In a dipping market, where it is difficult to pick the right equity fund, index funds are suitable for investors with a long-term view and those wanting to make returns at par with the markets,” said Vidya Bala, co-founder, primeinvestor.in   “Also, it is easier to average with index funds, as investors can track corrections in the frontline indices, such as the Nifty and the Sensex.”

In March, the Nifty had corrected 23.24 per cent, with selling pressure intensifying amid the coronavirus.

Industry participants say investors should be cautious with passively-managed funds in the current market environment.

“Passively managed funds had gained traction when the markets were stable as actively managed funds were unable to beat respective benchmarks with limited index heavyweights outperforming the markets. However, in the emerging markets, active strategies tend to cushion mark-to-market hit on portfolios during bear markets,” said Srikanth Matrubai, chief executive officer of SriKavi Wealth.

A recent study by Business Standard showed that actively-managed funds have fallen less than their benchmarks in the three-month period. In the large- and mid-cap scheme category, more than 90 per cent of schemes have fallen less than their benchmark in three months.

“A few things are working in favour of index funds. First, investors are realising costs matter and low expense ratios of index funds stand out. Second, active funds had not outperformed index funds in the 2019 bull market, which had dampened investor sentiments towards the former,” said Gaurav Rastogi, chief executive officer, Kuvera, an online mutual fund investment platform.

MF distributors suggest investors should opt for index funds over exchange-traded funds (ETFs) as the latter has lower liquidity and can see wider error tracking during sharp market swings.

“Even though index-linked ETFs can technically allow investors to exit or enter the exchanges on an intra-day basis, they see wide tracking errors during periods of high volatility as seen in recent months,” said a senior executive of a fund house.

In the recent market sell-off, ETFs have been positive during phases of trading sessions when the markets were down 7-8 per cent. Similarly, they have been unable to track swings when the markets have seen sharp spikes.