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Mumbai, Sept. 5: More investors are discovering that it is better to ride out stock market swings by riding an index fund — schemes that invest only in shares that make up key indices like sensex and nifty — than wager on a specific sector that appears tantalising.
The current share rally has left many investors, most of them with ill-equipped to gauge risks like the institutions do, stupefied at the way their stock picks soured.
Their dismay is in stark contrast to a small band, which has been laughing its way to banks by investing in a manner that would suggest they either had insider information or, from a more benign viewpoint, tips from punters.
They are investors in index funds — mutual fund schemes that helped beat stock fads by investing in just the way shares are weighed in an index. That keeps them insulated when the market mood starts shifting.
In the index futures segment, some investors have found out that the returns have been better than expected. “In an enduring bull-run, index and index funds, over a period of time, outperform diversified equity funds and individual stocks,” says Sanjay Sinha, fund manager for several index funds at UTI Mutual Fund.
Sectoral indices — those that track the movement of a few firms from an industry —have not kept pace with broader gauges. Over the past six months, for instance, sensex and nifty have beaten sectoral indices, which have seen sharp gains as well as steep declines.
There are more figures to buttress the proposition. On August 14, the BSE information index inched up 1.66 points even as the sensex jumped 6.52 points. The same day, the BSE FMCG index closed with a decline of 1.27 points. The 30-share BSE barometer registered a better performance as heavyweights in the PSU sector propped it up; FMCG and technology majors were laggards.
Four days later, on August 18, the trend was repeated. PSUs helped indices close 11.17 points higher. While the BSE PSU index was up 17.45 points, BSE information index crawled up 0.69 points and the heathcare index also limped along with a gain of less than 1 point.
By the end of the week, PSUs, invincible just days back, were out of favour. The BSE PSU index gave up 17.66 points, while the BSE healthcare index comprising pharmaceutical stocks surrendered 23.79 points.
In spite of the heavy losses in the two sectors that have a sizeable representation in the sensex, the index itself went up 21.44 points. It was abetted by a surge in the FMCG and information indices, which recorded a rise of 31.97 and 21.20 points respectively. The nifty, the benchmark 50-share index for the National Stock Exchange, also mirrored the trends spotted in the sensex.
“Various sectors and individual scrips may not show uniform movement in a rising market. But the benchmark indices often even out the highs and lows to generate a consistent performance,” said an analyst tracking indices for a leading institutional investor. Sinha seconds him by saying funds tracking benchmark indices have outperformed those that bet on sectors.
Analysts say most index funds and, in some instances, diversified funds have done better than sectoral funds and individual shares by spreading risks wider.