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Tata Mutual to launch index fund

Aabhas Pandya

Tata Asset Management Company is launching an actively managed index fund. Christened Tata Index Based and Derivatives Fund, the scheme will invest in the 30-stock BSE Sensitive Index (Sensex). Since the fund will be actively managed, it will attempt to beat the benchmark and not track it, as in the case of passive index funds. This will be the first index-based product from Tata Mutual Fund.

When launched, this will be the second actively managed index fund in the Indian fund industry. In 1997, Unit Trust of India had launched Index Select Equity Fund, which invests in stocks, drawn from both Sensex and NSE Nifty. There are four passively managed index funds, with three tracking the Nifty and one dedicated to the Sensex.

Under normal circumstances, Tata Index Fund will invest 80 per cent of its assets in Sensex while the rest will be equally split between index futures and money markets. The minimum investment in the fund has been pegged at Rs 5,000 and the AMC proposes to charge an initial load of 3 per cent. In other words, on an investment of Rs 5,000, the amount available for investment under the fund will be Rs 4850.

Since Tata Index Fund will be limiting its investments to the 30 Sensex stocks, it will essentially consist of large-cap quality stocks, which are highly liquid on the bourses. Currently, the stocks comprising the Sensex include heavyweights like Hindustan Lever, Infosys Technologies, Reliance Industries, ITC, Zee, Larsen & Toubro, NIIT, Hindalco, Tisco and Satyam Computer. Thus, while the portfolio will consist of top-rung stocks, the fund is unlikely to be as diversified as the benchmark.

Unlike a passive index fund where investments are made exactly in the same proportion as each scrip's weight in the index, a fund manager in an actively managed index fund has no such restriction. Thus, even as technology stocks constitute around 29 per cent of the Sensex, a fund manager, who is bullish on technology, may invest upto 50 per cent of assets in the sector. This makes an actively managed index fund more volatile than the benchmark and it may also outperform or under perform the benchmark by a wide margin. The fund manager has a leeway since it can hike or cut exposure to a sector, depending on its performance vis-à-vis the broad market. Hence, unlike a passive index fund, the fund manager has an important role in managing an active index fund.

That apart, an actively managed index fund will have a high portfolio turnover ratio than a passive index fund. This is because its active buy and sell strategy attempts to beat the benchmark. Thus, an active index fund will have a higher expense ratio due to bigger transaction costs. The annual management expenses will be 2.5 per cent for Tata Index Fund.

As for performance, there is only fund - UTI Index Select Equity. Since its launch in 1997, the fund has given an annualised return of 16.92 per cent as on September 30, 2000. And thanks to an active management, the fund has also beaten the passive index fund in the nine months ending September 30, 2000. While UTI Master Index (which passively tracks the Sensex) has lost 20.04 per cent, Index Select Equity has dropped only 14.78 per cent. On the other hand, the category of diversified equity funds has shed an average 22.66 per cent during the same period. Thus, thanks to active churning, a smart fund manager can surely help cut losses when the markets are in a bear phase.

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