Choosing the Right Index Mutual Fund: A Guide
When it comes to investing in a NIFTY 50 Index Fund, finding one with the lowest tracking error is key. This error measures the monthly variance between a fund’s returns and the index’s returns, with a lower tracking error indicating that the fund closely follows the benchmark index.
To help you make an informed decision, here are some practical steps to follow:
- Check Tracking Error Reports: Utilise independently compiled tracking error reports or screeners, such as the Excel-based index fund screener on Freefincal, which covers over 40 NIFTY 50 Index Funds and provides tracking errors over different time spans.
- Prioritise Low Tracking Error: Prioritise funds with the lowest tracking error and the smallest negative tracking difference over 1, 3, 5, and 8 years, if available. A lower tracking error indicates a fund that closely mirrors the NIFTY 50 index.
- Consider Expense Ratios: While a lower expense ratio usually helps reduce tracking error, it's not the only factor. Compare expense ratios alongside tracking errors to find the most cost-effective options.
- Confirm Fund AUM: Ensure the fund's Assets Under Management (AUM) is sizable to support efficient tracking. Larger funds tend to have lower tracking error due to better liquidity and portfolio management.
- Verify Tracking Error Disclosures: Consult the latest fund factsheets available on the mutual fund website for explicit tracking error disclosures. Compare these with third-party trackers for accuracy.
For instance, Nippon India’s ETF Nifty 50 BeES shows minimal tracking difference around -0.0006% to -0.0035% over 1 to 10 years, indicating very close index replication. The DSP Nifty 50 Index Fund is also noted for competitive expense ratios and low tracking error.
Remember, cash balances can be deployed during market corrections, potentially adding to the fund's returns. However, investments in short-term deposits, treasury bills, and other debt instruments can only boost returns if they perform well.
When selecting an index mutual fund, it's essential not to focus solely on high returns. Instead, prioritise the lowest tracking error among funds to identify those that effectively and consistently track the underlying index. Additionally, refer to ratings given to a particular fund by a platform for strengthening the decision-making process.
By following these steps, you'll be well on your way to finding a NIFTY 50 Index Fund with minimal tracking error and a solid potential for long-term growth.
- To diversify your portfolio, you might consider investing in both mutual funds and equity funds as they are essential components of the finance industry, contributing to personal-finance strategies and business growth.
- After ensuring a low tracking error in a NIFTY 50 Index Fund, it's also prudent to explore other mutual funds that focus on equity, such as Large Cap, Mid Cap, or Small Cap funds, providing a balanced mix and managing risk effectively.
- While investing in a NIFTY 50 Index Fund is crucial for long-term returns, it's equally important to allocate portions of your investments to additional financial instruments like bonds, real estate, or commodities, to maintain a diversified and robust business portfolio.
