Plan Ahead Financial Solutions (India

7G10, Wing 7B, Juhu Sangeeta Apts. Juhu Road. Mumbai 400 049. Phone: 91-22-3296 5933 / 022 26611730, Email:

The debate between active fund management and passive fund management has been on for some time now – with the believers of an index strategy both in India and internationally strongly recommending low cost index funds, whilst money managers have waxed eloquent about their stock picking abilities and their ability to beat the indices. We felt that this may be an appropriate time to share with you our findings on the use of index funds in a portfolio, considering that we seem to currently be in the midst of a very sharp contraction of stock prices. What are Index Funds? An Index Fund is a mutual fund or an exchange traded fund that mirrors its portfolio to that of a particular index such as Sensex, Nifty, etc. The stocks are in the same proportion as the underlying index. For example, in an index fund that tracks the Sensex, the funds portfolio will constitute all the 30 Sensex stocks in exactly the same weights as is held in the Sensex. There is no decision to be made on what companies must be held, for how long and how much must be invested in each of them. Since the fund manager’s only aim is to capture the index return, his fund will mirror the index constituents exactly. He would keep the fund’s trading to the minimum level needed to accurately track the index. This is contrary to active management where the fund manager employs a wide array of stock selection techniques, intensive research, sector picking and market timing to try and beat the respective indices. Index funds work best in efficient markets (i.e. markets where it is impossible for investors to gain above normal returns because all relevant information that may affect the stock’s price is already incorporated within its price) However, analysis show that Index funds have started to act as a hedge in falling Indian markets. Active Funds -35.94 Index Funds -35.24 Out Performance by Active Funds -0.7

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investors should start considering the index funds as an option to diversify their portfolio. The statistics favour active funds over the index funds on a longer term horizon.86% Average Index funds returns (Net of Expenses) -55. Indian markets have gone through regular bear phases. This bear phase typically lasted for 1. Email: contact@planaheadindia. This drives home the point that index funds tends to perform better than most of the actively managed funds in bearish phases.18% Average Active funds return (Net of Expenses) -56. Juhu Sangeeta Apts. Disclaimer: This document and the information contained therein is strictly confidential and meant exclusively for the selected recipient and may not be copied or modified or transmitted without the consent of Plan Ahead Financial Solutions. Wing 7B. Juhu Road. but on a shorter term horizon the index funds have outperformed the active funds. the predominant one being the aftermath of the tech boom. A good way to build a smart portfolio would be to blend active and passive stock investments. Phone: 91-22-3296 5933 / 022 26611730.75% The index funds had out performed the active funds on an absolute return basis by 1. the index funds acts as a tool to cut loses on the down side during bearish phases. Mumbai 400 049. Index funds can therefore be allocated a small proportion of the overall Portfolio. In other words. .2001 (Bear Phase) Absolute Returns (%) BSE SENSEX -56. Though the actively managed funds are an essential for growth and capital appreciation of assets. A close look on the performances of the actively managed funds and the index funds in this period throws the following outlook: Returns from 11.5 years stretching from February 2000 to September 2001.09. This report is for information purposes only and nothing should be construed to be of any investment advice.02. Please read the offer document for more detailed information on the scheme and risks before investing.2000 to 21.Plan Ahead Financial Solutions (India) INDEX FUNDS : HAS THEIR TIME COME? The above table analyses the average returns of active funds (diversified large cap funds) over the Index funds over different time frames.11% Average Out performance by Index Funds 1.