Index funds are merely supposed to mimic the returns provided by the underlying benchmark index such as the Sensex or the Nifty. Essentially, these funds are expected to follow the passive investing route, buying and holding stocks in the index in the same proportion as the index. However, many mutual fund (MF) houses offer slightly tweaked variants of index funds, by including an element of active management, promising to deliver better performance than the underlying benchmark and other index funds. But almost always, such funds become too clever by half in their futile attempts at beating the broader markets.
Such funds invariably have the term 'plus' or 'advantage' attached to their name, indicating that the fund manager intends to offer something extra-that is, returns superior to the underlying index. Sadly, the 'extra' bit ends with the name itself. Take for instance, JM Nifty Plus Fund which has made an ass of investors.
Launched in February 2009, this fund has yielded returns of 42% since inception, failing to catch hold of the phenomenal rally that ensued post March 2009. Its underlying index, S&P Nifty, has jumped 56% over the same period.
Since inception, ING Nifty Plus Fund has provided returns of 16%, while its underlying index, S&P Nifty, has managed to deliver 18% returns over the same period. The LIC MF Index Fund is also severely lagging behind its underlying index, the BSE Sensex. Since inception, the fund has provided returns of 16% while the BSE Sensex has yielded returns of 24%. The HDFC Index Fund- Sensex Plus Plan has so far managed to live up to its mandate. While its benchmark, the BSE Sensex, has provided 23% returns since its inception, the fund has managed to deliver 26%.
It is not just the adapted index funds that fall flat on their faces. Pure vanilla index funds also make a hash of passive investing. With unforgivably high tracking errors, these funds have failed to do justice to the concept of passive index investing. For instance, the LIC MF Index Fund-Nifty Plan and LIC MF Index Fund-Sensex Plan has tracking errors as high as 7% and 5%, respectively. The HDFC Index Funds linked to the Nifty and Sensex, too, run a high tracking error of 3%.
Index funds attempt to deliver outperformance by either tweaking the portfolio underlying the benchmark index or by altering the weightages assigned to each constituent of the index. Fund managers also try their hands at timing the market, much to their own peril. Such enhanced indexing and market timing defeats the very purpose of an index fund and leads to substantial underperformance relative to the benchmark. It thus translates into a huge tracking error, which is appalling for a fund that is only tasked with following the broader index.
While the bids for 3G reached Rs16,828 crore for pan-India licence against the reserve price of Rs3,500 crore, the bids for BWA have already gone over five times the reserve price
The Indian government is witnessing a windfall with the robust response to e-auction for the third generation (3G) spectrum and for broadband and wireless access (BWA). While the 34-day auction for 3G saw bids reaching Rs16,828 crore for a pan-India licence against the reserve price of Rs3,500 crore, the bids for BWA have already gone over five times the reserve price.
According to details provided by the Department of Telecommunications (DoT), as of Wednesday (2nd June), 62 rounds of bidding have been completed. On its eighth day, the bidding price for BWA touched Rs8,604.14 crore as against the reserve bid price of Rs1,750 crore. With this price, the government is assured of receiving revenue of Rs25,812 crore as against its expectation of Rs15,000 crore.
BWA spectrum is necessary for companies to roll out worldwide interoperability for microwave access (WiMAX) services that enable handheld devices and laptops to access the Internet. There are three pan-India slots for BWA spectrum with one slot reserved for the State-run telecom player in each circle. This leaves 11 companies fighting for two slots of 20MHz BWA spectrum.
As many as 11 companies-Bharti Airtel, Reliance WiMax, Idea Cellular, Aircel, Augere Mauritius, Infotel Broadband Services, Qualcomm, Spice Internet Service Provider, Tata Communications Internet Services, Tikona Digital Networks and Vodafone Essar-are participating in the BWA auction.
The government has already allocated one block of 20MHz of unpaired spectrum each to its units Mahanagar Telephone Nigam Ltd (MTNL) and Bharat Sanchar Nigam Ltd (BSNL) in their respective service areas. Both MTNL and BSNL will have to pay the winners' price.
The successful bidders in the BWA auction can use the assigned frequency for commercial purposes immediately after they get the spectrum.
Coming back to the e-auction, at the end of 62 rounds, bids for Delhi and Mumbai reached Rs1,304.66 crore each. They were followed by the Tamil Nadu circle with a bid of Rs1,197.95 crore while the bid for Maharashtra stood at Rs915.64 crore; Gujarat at Rs528.82 crore; Andhra Pradesh at Rs894.39 crore and Karnataka at Rs947.92 crore.
While there is excess demand in three circles-Tamil Nadu, Punjab and Rajasthan-for 12 circles there is negative demand while there is no demand in seven circles.
Earlier this week, nine telecom companies, including Bharti Airtel, Reliance Communications, BSNL and MTNL together paid Rs67,719 crore to the government as licence fees for 3G spectrum.