What is an Index Hugger?

Have you ever found yourself going through recipes on YouTube and later trying them out in your kitchen? What if a fund manager did that and got you returns? Don’t worry, they don’t base their investment decisions on YouTube. They instead track the index (like SENSEX or NIFTY) and invest in companies that are part of that index.

An index hugger fund is a mutual fund scheme that closely follows the market index. It invests only in those stocks that are a part of the benchmark index. Index huggers are actively managed mutual funds which act like the index it follows. Therefore, they are expected to deliver higher returns compared to other funds.

The overall proportion of total stocks in this fund is almost similar to the market index it follows. As it has a similar portfolio, the total movement in the fund is also likely to be the same as the index. For example, NIFTY 50 moves up by 200 points, the index hugger fund that follows it will also move up around 200 points.

It is important to note that an index hugger fund and Index ETFs or exchange-traded funds are not the same. The ETFs blindly replicate the benchmark index while the index huggers have a strong resemblance with the index. Unlike index huggers, ETFs are passively managed funds.

How does an index hugger work?

Mutual funds are either actively or passively managed. The passively managed funds are generally created to restrict trading and generate passive long-term returns. Passive funds usually follow a buy-and-hold strategy.

The index hugger funds often keep making alterations in their portfolio. The fund manager creates a portfolio of stocks that are similar or the same as the benchmark index. They make the iterations based on the changes in the benchmark index. It also similitudes to the weightage of selected stocks.

The main purpose of index huggers is to deliver high returns by actively trading in the stocks. The management expense is high as compared to other mutual fund schemes.

Why does an index hugger fund matter?

Many investors are keen on booking gains from the movement in the stock market. The ideal market gain or loss is determined by the market index like Sensex or NIFTY.

The fund manager actively takes care of the index hugger to enter and book the gains at the right time. Unlike ETFs, index huggers are known to deliver higher returns for which the fund managers are paid high management fees.

The risk level in such schemes is the same as the risks involved in the index, as the fund and index are almost identical. To put it in a place, index huggers are the actively managed version of ETFs known for delivering higher returns at the cost of comparatively high management fees.

Frequently Asked Questions

1. Are you paying high fees for an index hugger fund?

The fund manager keeps an eye on the movement in the index to replicate the trades and make the portfolio changes accordingly. This process is followed to deliver higher returns, which might not be the case every time.

2. Can you lose money in an index fund?

The index hugger funds might not fully resemble the benchmark index which may result in losses. Apart from that, an investor might make a relative loss by paying higher management fees than other passively managed funds.

But, if the fund manager is investing in growth stocks and makes the right move by identifying the movements of the benchmark index, there are negligible chances of losing money.