A tracker fund is a fund incorporated to track a broad market index or a segment of it. These funds are aiming to replicate the performance of the market index. The primary advantages of these tracker funds are that the investors get an overall exposure to the whole index at a much lower cost. These funds are also known as index funds.
Why Tracker Funds?
Passive Investment Model:
The concept is straightforward within these funds. Multiple investors want to replicate the success of an overall broader market index or a theme within the broader market. These investors would not have the time or the knowledge to analyze and then construct a model portfolio to invest in. Hence, these tracker or index funds are ideal options as they are precisely replicating a particular index. Changes in the index’s composition will immediately be reflected within these funds. Hence, it becomes a viable option for investors who want to invest passively in the financial markets.
Many investment firms are partnering with specialist index providers or creating their customized indexes for passively managed funds to use. They now include the personalized market segment, industry, and theme indexes. They are still trying to follow a predefined market index, but they provide a more focused investment.
Diversification without complications:
The tracker funds offer the theme of diversification to their investors. Consider a tracker fund that replicates the Nifty50. This tracker fund would hold about 50 different stocks. Now, while the performance of the individual stocks may fluctuate over time, investing in a fund that holds all of them helps an investor replicate the index’s performance. The primary reason for diversification is to ensure that the portfolio’s value is not overly correlated with the fortunes of a single company listed in the index.
The tracker funds also have lower costs associated with them. An actively managed fund will have included the management fees that the fund manager would annually collect. These costs are generally higher in an actively managed mutual fund because the fund manager aims to outperform the market. There are multiple purchases and sales of securities to beat the indices, which also increases the turnover costs for these actively managed mutual funds. While the tracker funds have only to replicate their respective index, there is very little expense that will be incurred on the fund’s management. The turnover costs will also be below as the modification in the fund will only happen when there is a change in the broader market index that the fund is tracking.
Longer-Term outperformance over actively managed funds:
In 2007, legendary investor Warren Buffett made a $1 million bet against Protégé Partners that hedge funds wouldn’t outperform an S&P index fund (Tracker Fund), and he won. Warren Buffett claimed, “Costs matter in investments. If the returns are going to be 7%-8% and an investor pays 1% for fees it makes a great difference in how much money an investor will have in retirement. The trick is not to pick the right company. The trick is to buy all the big companies through the S&P 500 essentially and to do it consistently.” In the longer term, it is tough for actively managed funds to outperform the index. Many large-cap funds failed to beat their respective indices and passive funds based on annualized daily rolling returns in India itself. In a very long perspective of 20 years, 57% of large-cap funds have underperformed both the Nifty50 Index and India’s oldest index, BSE Sensex. As the Indian markets would develop and become efficient, the outperformance of the large-cap funds may reduce even further. These tracker funds provide the investors with the benefit of automation and simplicity of investing simultaneously.
Best Tracker Funds 2021
Nippon India Index Fund – Sensex Plan is one of the most promising tracker funds for Indian investors. The scheme’s primary objective is to replicate the Sensex composition and generate returns that are replicable to that of the Sensex, subject to tracking errors. The NAV of this fund is INR 27.62 as of August 18, 2021. The launch date of this tracker fund was September 28, 2010. The fund is managed by Mehul Dama and has a 99.85% allocation in equities.
LIC MF Index Fund Sensex, listed at a NAV of 91.252 as of August 18, 2021, is another fund that aims to replicate the index’s performance of either Nifty/Sensex. It is based on the plans by investing in the respective index stocks subject to tracking errors.
ICICI Prudential Nifty Index Fund, SBI Nifty Index Fund, UTI Nifty Next 50 Index Fund all aim to replicate the performance of Nifty50. In comparison, Motilal Oswal S&P 500 Index Fund aims to replicate the S&P 500 Index of the USA. It has the top 500 companies of the USA like Coca-Cola, Apple, Facebook, Google, Netflix, Disney, and many more that are listed on the index.
Motilal Oswal Nifty Bank Index Fund is primarily based upon the Bank Nifty Index. The fund is primarily based on the banking segment and has recorded an INR 12.89 as of August 18, 2021. The fund was initially launched on August 19, 2019, and has an AUM of 120 crores.
Similarly, many funds are replicating a particular theme like Metal, Banks, Financial Services, and many other sectors.
Summing it up:
Tracker funds are an advantageous investment option for investors. These funds allow the investors to invest into the broader market themes and indices, which helps the investors mitigate the risk by the optimal amount of diversification with lower fund costs associated with the same. Investors should look at the tracker funds as a longer-term investor avenue as in the long term. It is complicated for the actively managed mutual funds to beat the indices. There are multiple top tracker funds available in the market to park one’s funds for passive compounding growth.