It’s the right time for long-term investors

The current bull run, which began in April 2003, shows no signs of abating. Barring the odd hiccups every once in a while, both the sensex and Nifty have shown a consistent upward trend. To answer the question whether ‘it is a time to exit index funds?’ one needs to understand what index funds are and how they work. Index funds are mutual fund schemes that purport to invest in a basket of stocks similar to that of its benchmark index and in the same proportion. This proportion is same both for stock as well as sector allocations. The performances of such funds are, therefore, closely linked to the performance of the underlying benchmark index. In India, we have index funds that track either the S&P CNX Nifty or the BSE sensex. Both are largecap indices and therefore, by default, the index funds tracking them are ‘largecap’ funds. Index funds differ from regular diversified equity funds in the sense that index funds are passively managed whereas diversified equity funds are actively managed. And while the topic of ‘active vs passive managed funds’ is open to debate, the fact is that passive management reduces the cost of operating funds and thus enhances the returns such funds generate. In contrast, active fund management enhances the chances of outperforming the market average, reflected by the indices. Investors, looking to invest in quality stocks across the leading sectors, can take a medium to long-term view and patiently ride through the market gyrations, can consider investing in index funds. The answer to the question on whether to exit index funds, is ‘No’. For common sense tells us that an exit from equities per se should be when the markets are on a high and entry should be when the markets look ‘attractive’ and valuations look relatively cheap. In fact, we should be thinking the other way round: at these levels, it’s a good time to invest in the index. The one thing that investors should keep in mind though is that mutual funds per se are not an investment avenue for the short-term as they invest in a basket