All market index funds make diversified investing easy and simple

Remember that such funds may correct more than a frontline index during a market correction

Broad-based market indices are back in focus with the new fund offer (NFO) of Motilal Oswal BSE 1000 Index Fund opening for subscription. Fund houses like Mirae, Bandhan, Groww and Angel have also launched passively managed schemes which track the Nifty Total Market Index.

 

“These funds provide broad market exposure through a single investment, eliminating the need to choose individual stocks or select between different market segments like large, mid or smallcap. This makes it easy for investors, especially beginners, to gain diversified access to the entire market without the complexity of constantly managing and rebalancing a portfolio,” says Sirshendu Basu, head – products, Bandhan Asset Management Company (AMC).

 

Motilal Oswal BSE 1000 Index Fund (MOB1000) tracks the performance of the BSE 1000 Total Return Index (TRI), subject to tracking error. This index covers the top 1,000 stocks by market capitalisation listed on the BSE. Another broad market index tracked by index funds and exchange-traded funds (ETFs) is the Nifty Total Market Index, which features the top 750 listed stocks.

 

Diversification tool

 

A broad-based index fund enables exposure to a diversified basket of stocks. “Broad-based indices offer exposure to the entire spectrum of the market, thus providing greater diversification,” says Kaustubh Belapurkar, director – manager research, Morningstar Investment Research India.

 

Such a diversified portfolio includes smaller companies with higher growth potential.

 

“The Nifty Total Market Index includes all 22 sectors classified by the National Stock Exchange (NSE), and comprises the top 100 largecap, 150 midcap, 250 smallcap and 250 microcap stocks,” says Siddharth Srivastava, head – ETF product and fund manager, Mirae Asset Investment Managers (India). No single stock or sector trend significantly shapes overall portfolio performance.

 

Index funds also ensure lower costs and eliminate fund manager risk.

 

Periods of muted returns

 

A broad market index fund may not perform well during periods of consolidation. These schemes may yield muted returns in sideways markets, where only a handful of stocks drive gains.

 

“Since total market index funds do not focus on specific sectors or market cap categories, they typically do not generate the outsized returns that a fund targeting a particular market cap (large, mid or small), a sectoral or thematic fund might offer,” says Basu.

 

Broad-market funds are also more susceptible during market downturns. “They may have higher drawdowns than frontline indices like the Nifty 50,” says Srivastava.

 

What to consider?

 

Investors should check the tracking error, as broad market index funds may struggle to replicate performance given liquidity constraints in the small and microcap segments. “The biggest risk of a broad-based index fund is a significant tracking error. These funds will tend to be more inefficient in tracking the index compared to narrower, mega-cap focused index funds, primarily due to the number of stocks and lower liquidity in smaller-cap stocks,” says Belapurkar.

 

Investors should also consider the expense ratio. “A lower total expense ratio (TER) helps improve long-term returns through better compounding. Comparing TERs and tracking metrics across similar funds can lead to smarter investment decisions,” says Srivastava.

 

Who should invest?

 

Broad market index-based funds suit investors who lack access to quality advice but want equity exposure. “They are suited for those who don’t have the time or the desire to manage multiple funds. They are suited for core allocation. Investors aiming for a fully passive core equity portfolio may allocate 60-80 per cent of their equity investments to these funds,” says Basu.

 

Srivastava recommends a long horizon of at least five to seven years in these funds.