Index fund investing for Long term horizon

Dear Investors

I have been planning to invest in an index-based fund for a long-term period.

And I have to eliminate some doubts and queries before taking the final decision, so I came here to find answers.

Below I’m listing my queries, which needed to be answered.

  1. Which index is more preferable? NIFTY / SENSEX and why?

2.Should I invest in Index tracking mutual funds or ETF which track the particular index? And why?

  1. List some of the best Index based ETFs & Passive index funds available in India with higher AUM, lowest expence ratio and lowest tracking error.

Honestly there is no difference. Nifty is a composite of 50 stocks whilst sensex is a composite of 30 stocks. Optically Nifty is diversified than sensex, however if you look at the weightage of each stock the remaining 20 stocks that is there in Nifty has very small weightage. Hence going by the number Nifty is diversified upto 50 stocks as against Sensex. However I prefer Nifty to Sensex.

If you are active in stock market and have a demat account then you could think of ETF. The cost of ETF is quite low when compared to Index funds. Although the variance is small it might make a difference if you are going to hold it for a very long period. At the same time, do note that having a demat account is mandatory for ETF and hence if you are not quite active in buying and selling shares, there will be demat and other charges which you should consider. Do read the pros and cons of ETF investing.

I leave this to you to do a basic search on the net and you will find the list of Index funds and ETFs.

Discl: These are my personal views, do a comparitive study of corporates in nifty and sensex and take a call. Do read the pros and cons of ETFs.

This is the best database of ETFs I can find.
Download .csv file and use filters in Excel to find what you want.

https://www.nseindia.com/market-data/exchange-traded-funds-etf

https://tradingqna.com/t/how-to-find-etfs-like-bond-indternational-etc/133805

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  • NIFTY 50 is well diversified so go for it.

  • Most of the people say ETF is better than index funds. But ETF has liquidity issues. ICICI, NIPPON, SBI ETF’s are good, rest all are not having enough volumes. I prefer Index funds to avoid liquidity issues. Also for index funds once SIP is created you don’t need to worry about daily markets. but in case ETF, like a trader your mind always thinks about buying at lower iNAV. If you are an active trader then ETF is good. But for long term investor, index funds are good

  • I can’t say which are the best ones. Here are the few things you can consider for selecting best index funds

  1. low expense ratio (NAVI)
  2. AUM size of atleast 500 crores (ICICI, UTI, HDFC…)
  3. Fund age of atleast 2+ years (ICICI, UTI, HDFC, SBI, NIPPON…)
  4. IMP: low tracking error
  5. AMC should be matured one of 5+ years (UTI, KOTAK, ICICI, HDFC…)

@blue_bear Since all are following the same index. Returns difference would be small between the AMC. so you can select any index funds.
You can add a Nifty 100 also to your portfolio. This provides additional diversification. So you will be investing in top 100 companies of our country.

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Nifty is a great investment choice, it’s diversified and is a great long term hold. Before you take any decision, you need to conduct your own research to see if it works for your personal goals.

Sensex has only 30 companies, while Nifty 50 has 50 companies. It means that Nifty 50 is wider than Sensex. The wider the index, the lower the risk of concentration.
So, the Nifty 50 is better, in my opinion, as it is more diversified and has a lower concentration risk.

Nifty is a good investment choice only for creating a retirement corpus. Don’t expect more than 12% CAGR in the long run. (More like an alternative to PPF).

Thanks for your answers.

So speaking of liquidity how liquid are ETFs compared to mutual funds? Also how ETF distribute the dividends earned by the the underlying stocks?

Currently only few ETF’s are liquid with more in volumes. So index funds are better than that. If you dont want to place trader orders and keep on watching inav and market ups and down, simply go for SIP with Index funds (AXIS NIFTY 100/ UTI Nifty 50/ HDFC Nifty 50).

It depends. some ETF’s give periodically some ETF’s wont give. Index funds(growth) option reinvest the dividends

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There’s not much difference between the two other than the number of companies in both. As NIFTY contains 20 more companies than SENSEX, it is better to consider investing for the long term. It has a low concentration risk too.

@blue_bear
Go for single Axis Nifty 100 index fund or HDFC Nifty 100 index fund - Covering top 100 companies
Invest for at least 10 years
Don’t go for ETF’s. it has liquidity issues

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Extra Info.

EFTs have half the expense ratio of index funds.
For eg.
NIFTYBEES 0.05%
Nifty Index Fund 0.1%

Regarding liquidty, search for ETFs with high AUM. They don’t have much liquidity problem.
Most of the good NIFTY50 ETFs have high liquidity. (NIFTYBEES, ICICI NIFTY 50 ETF, etc)

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Sensex has been performing better than Nifty, but Nifty is more liquid and observes high buyers and sellers. As Nifty has 50 companies (Sensex has 30), it is better to consider it for the long term. You can consider ETFs, but there are certain ETFs that you should avoid for long-term investment, like inverse and leveraged ETFs.

  • Do weekly SIP in any NIFTY 50 index fund
  • ETF is more like stocks. For long term investing mutual funds are good
  • ETF’s are mostly used by traders