Are we moving towards an index funds world?

A series of swift changes have swept over the Indian mutual fund industry with the recategorization guidelines issued by SEBI. In order to adhere to these guidelines, many schemes have been changed their fundamental attributes. Also, the MF houses now refer to the total return index as benchmark, which itself is a sign of a maturing industry.

With the strict mandate towards mutual fund categorisation, there won’t be huge discrepancies in the returns from the funds within a single category. For instance, in the new circular, the market regulator has mentioned and asked large-cap mutual fund schemes to invest 80 per cent of their corpus in the top 100 companies categorised as large-cap, so there isn't much room for these schemes to generate excess alpha over the benchmark. So in this scenario, the scheme's performance will largely match the benchmarks.

In simpler terms, when your investment universe is strictly defined then more or less you will be betting on the index. Still there is possibility that a fund manager can take the best call to reap more returns and beat the benchmark, but the possibility is very less. So the index funds seems to be a good bet now.

The index funds are much simpler. These funds typically replicate the indices in the proportion similar to the index constituents. Therefore these schemes typically perform with the indices they are tracking and also incur lower expense than other schemes.

The shift towards index funds seems to be obvious, but it will take some time. Even with the move of lowering TER SEBI is ensuring low-cost opportunities for the investors in the actively-managed fund space. With the maturity of the markets, the Indian mutual fund industry is also witnessing huge opportunity in the index funds just like other developed mutual fund industry.