Weekly Musings – NFO Pick (Axis S&P BSE Sensex Index Fund)

21 Mar 2024 , 05:48 PM

WHY BSE SENSEX INDEX FUND AT THIS JUNCTURE?

The legendary Jack Bogle famously said, “Why look for a needle in a haystack, when you can buy the entire haystack.” Effectively, buying the Sensex fund is akin to this approach. The Sensex has a pedigree that extends to about 40 years during which period, it has gone from 100 to 72,000 levels. Even as a passive investment, the CAGR beats most active strategies in India. But there are some specific reasons why a BSE Sensex Index Fund adds value to the investor.

1. As a diversified fund, the Sensex fund offers investors access to the biggest and most respected companies in India, in terms of pedigree and past performance.

    

2. Being an index fund, there is no stock selection and fund management costs. This makes it more economical, which is passed on to investors in the form of lower TER.

    

3. The returns are market linked, so the investor earns the returns that the Sensex generates. Incidentally, Sensex had given returns of about 20% in 2023.

    

4. As an index fund, the Sensex index fund eliminates the risk of fund manager bias. Normally, the bias and conditioning of individual fund managers impacts funds.

    

5. The Sensex has been a powerful wealth creator over the last 44 years, returning impressive returns of more than 16% on a TRI basis on a consistent basis.

It is the blend of diversification, easy access, and low total expense ratio (TER) that makes the Sensex index fund uniquely attractive to investors.

HIGHLIGHTS OF A BSE SENSEX INDEX FUND

Here are some of the standout features of an index fund that is pegged to the benchmark S&P BSE Sensex index.

• It is a vehicle for passive investing, where the fund purely replicates an underlying index, in this case, the S&P BSE index in terms of TRI returns. It is low in cost and the passive strategy ensures that the ROI over the longer term is close to an active fund.

   

• The fund offers a naturally diversified portfolio of 30 stocks, in the same proportion as in the index. This ensures a low value entry ticket into a highly diversified blue chip portfolio with minimal individual stock selection intervention.

   

• The large cap companies comprising the S&P BSE Sensex account for nearly 40% of the market cap of the Bombay Stock Exchange. This ensures that the portfolio is also representative of a generic market portfolio.

   

• The Sensex has, for long, been a good barometer of the Indian economy, reflecting the crests and troughs of the Indian economy. This is especially relevant at a time when India is transitioning from $3.5 Trillion economy to a $5 Trillion economy.

   

• The Sensex Fund offers a long term approach to equity investing with minimal unsystematic risk and only the Beta risk in the fund.

The stellar compounded returns of the Sensex over the last 44 years are a testimony to the fact that it is the best reflection of the growth of the India story.

WHY AN INDEX FUND OVER AN INDEX ETF?

The general belief is that the index ETF has a lower cost compared to the index fund. However, here is what investors must be aware about the merits of an index fund. Firstly, an index fund only has the TER cost and the exit STT costs. However, an index ETF also has brokerage costs, statutory costs and demat charges. If you select the direct plan of an index fund, it can be competitive with an index ETF in terms of overall costs. 

Secondly, the index fund does not require the investors to have a trading account and a demat account, unlike an index ETF. Also, the index fund is based on day-end NAVs so the volatility is less than in an index ETF. Lastly, the index funds are amenable to systematic investment plan (SIP) and systematic withdrawal plan (SWP) structuring. Such a structuring is not possible in case of an index ETF, due to it being a market driven product. 

MACRO BASE CASE FOR INVESTING IN AN INDEX FUND

Here are some strong reasons why investors should consider investing part of their monies in a generic and diversified index fund.

• India is likely to grow at 7% in FY25, which will be 3 consecutive years of above 7% growth. India is already the fastest growing large economy in the world, with a strong domestic market, and that is best reflected in the Sensex.

   

• The market cap of the BSE is already at $4.5 Trillion and, while it is the fourth largest by market cap after the US, China, and Japan; the Indian market cap is just about 10% of the US market cap. That leaves a huge journey yet to be traversed for the indices.

   

• The Sensex has a rolling P/E of 23.24X, Price to book value of 4.11X and a dividend yield of 1.14%. Historically, the Sensex has also been a dynamic index in composition, so you get macro flexibility and adaptation without putting any additional efforts.

   

• While financials, IT and oil & gas still dominate the Sensex, several other sectors like FMCG, automobiles, capital goods, telecom and power have acquired heft in last few years. This makes the BSE Sensex diversified, representative and lower on risk.

   

• In the last 24 calendar years, the Sensex had only 3 years of negative performance and 21 years of positive performance. In 13 out of these 21 years, the Sensex has delivered double digit returns.

   

• Let us look at 3-year Sensex rolling returns over a 10-year period. It has 99.8% positive observations compared to 92.2% for mid-cap index and 87.0% for small cap index. In terms of standard deviation adjusted returns in this period, Sensex is at 2.71 while mid-caps at 1.68 and small caps at 1.35 are less flattering.

The Sensex offers a good long term risk-adjusted returns story for investors, looking at a passive way to participate in stock markets

PROOF OF THE PUDDING LIES IN GROWTH 

The growth in passive funds in India has been frenetic. Between 2017 and 2024, the assets under management (AUM) of passive funds in India has grown from ₹80,630 Crore to ₹8,49,775 Crore. That is a 10-fold growth in 7 years and this is just the beginning. As active funds struggle with fund manager bias, problems with kurtosis and liquidity challenges; the passive funds are emerging as a smart alternative. Passive funds in India are still about 15% of the overall AUM compared to the global average of well over 50%. That is the opportunity that the S&P BSE Sensex Index Fund NFO is tapping.

PERFORMANCE OF EQUITY INDEX FUNDS IN INDIA

Here is a quick look at the best performing frontline equity index funds in India as of February 09, 2024. These are CAGR returns.

Scheme  Name	NAV  Direct	3-Year (%)  Returns	5-Year (%)  Returns	Launch  Yield (%)	Daily AUM  (₹ Crore)
ICICI Prudential S&P BSE Sensex ETF	797.31	12.98	15.65	16.80	5,468.96
Mirae Asset Nifty 50 ETF	229.35	14.14	15.92	15.81	2,139.21
Nippon India ETF Nifty 50 BEES	240.14	14.16	15.94	15.75	20,717.99
ICICI Prudential Nifty 50 Index Fund	215.59	13.66	15.39	15.01	6,816.77
HDFC Index Fund Nifty 50 Plan	203.18	13.68	15.42	14.98	12,258.63
HDFC Index S&P BSE Sensex Fund	652.56	12.51	15.10	14.97	6,360.39
HDFC Nifty 50 ETF	237.64	14.14	15.91	14.96	3,191.90
SBI S&P BSE Sensex ETF	773.46	12.94	15.63	14.51	1,05,293.17
ICICI Prudential Nifty 50 ETF	238.85	14.17	15.94	14.42	11,823.92
UTI Nifty 50 ETF	233.70	14.14	15.91	14.37	48,056.16
SBI Nifty Index Fund	189.59	13.53	15.13	14.26	6,275.42
UTI S&P BSE Sensex ETF	768.65	12.43	15.32	14.14	36,423.51
ICICI Prudential S&P BSE Sensex Index Fund	22.98	12.47	15.24	13.92	1,339.02
DSP Nifty 50 Equal Weight Index Fund	21.93	19.85	18.48	13.28	1,069.03
SBI Nifty 50 ETF	227.02	14.13	15.91	12.73	1,73,387.29
Aditya Birla Sun Life Nifty 50 ETF	24.71	14.17	15.93	12.51	2,079.16
Kotak Nifty 50 ETF	233.85	14.04	15.81	12.39	2,146.53

Data Source: AMFI India

To get a picture of how generic index funds have performed, we have considered 3 categories of funds here; viz. Nifty index Funds, Sensex index funds and Nifty Next-50 index funds. For completeness, we included equity index funds and index ETFs. While the index funds and index ETFs differ conceptually, they are similar in structure in that they offer a passive approach to the generic indices.

Launch returns have varied between 16.80% and 12.39% since launch on a CAGR basis. The average returns since launch stands at 14.40%, which is about 100 bps lower than what you would have earned on large cap funds. In short, the passive index funds have offered a long term return that is just about 100 bps lower than the active funds, with a substantially lower risk of volatility. That is what makes these indexed funds attractive to investors.

GLANCE AT THE AXIS S&P BSE SENSEX INDEX FUND NFO

Here are some details of the Axis S&P BSE Sensex Index Fund NFO you must know to decide on investing in the fund.

1. The NFO of Axis S&P BSE Sensex Index Fund opens for subscription on February 08, 2024 and the NFO subscription will close on February 22, 2024. Being an open ended fund, the fund house will offer purchase and redemption at NAV linked prices.

    

2. The Axis S&P BSE Sensex Index Fund NFO offers an opportunity to investors to participate in a diversified portfolio of large cap frontline stocks with pedigree and history of performance. While the portfolio will be diversified, the overall risk of equity investing will still be there, although stock selection risk is eliminated.

    

3. Entry loads do not exist in India. In terms of exit loads, being an index fund, there is no exit load either. Investors are free to move in and move out at minimal cost. The STT will, however, continue to apply on sale. However, despite having no exit load, it is suggested to stay invested for at least 5-7 years to get full index fund gains.

    

4. Let us turn to minimum investment in the NFO. Investors can put in applications for a minimum of ₹500 in the NFO and in multiple of ₹1 thereafter. Additional purchases on an ongoing basis will also be subject to the basic size condition.

    

5. The fund offers Regular and Direct plans for the investors. In addition, investors can either choose the Growth option or the IDCW (income distribution cum capital withdrawal) option. Dividend plans offer payout and reinvestment options.

    

6. How will the fund performance be benchmarked? The Axis S&P BSE Sensex Index Fund is already an index based fund, so question of outperformance does not arise. The focus of the fund would be to replicate the underlying index (S&P BSE Sensex TRI) by reducing tracking error. TRI index also includes the dividend impact to give an accurate picture.

    

7. The fund managers for the Axis S&P BSE Sensex Index Fund will be Karthik Kumar and Ashish Naik. The two fund managers have a combined work experience in the fund management industry of 30 years. Being a passive fund, the focus of the fund managers would be more on keeping the tracking error within acceptable limits.

    

8. The investment objective of the fund is to seek long-term capital growth by replicating the S&P BSE Index on a TRI basis and minimizing tracking error. However, returns are not assured. It is classified as a high risk fund due to its predominant equity exposure. Although it is a tracking fund, there is no guarantee of positive returns.

    

9. The Axis S&P BSE Sensex Index Fund will be classified as an equity fund for tax purposes. Dividends will be taxed at incremental rates for the investor. Short term capital gains (held for less than 1 year) will be taxed at 15% while long term capital gains (held for more than 1 year) will be taxed at 10% flat above the base exemption limit of ₹1 Lakh.

The Axis S&P BSE Sensex Index Fund NFO is an opportunity for investors to participate in the long term growth and appreciation of the general market through a passive approach. The passive focus keeps costs low; at the same offers a diversified approach to return and risk.