A growth fund, BoI Double Square Plus aims to achieve capital growth by investing in equity shares without sector or size specialisation. BoI Double Square Plus A provides for annual declaration of income. The income distribution for any year will not be less than 14.75 per cent and reinvested in the scheme, thus allowing the investor to claim tax benefits under section 80L of the Income Tax Act.

Plan B of the fund is the growth option. Thus at maturity, a BoI Double Square Plus investor will get atleast four times the amount invested. Besides, repurchase is promised at twice the par value after five years and at three times the par value after eight years to original investors only.

BoI Double Square Plus A has managed to honour its commitment so far. But since August 1994 there has been a steep slide in performance with NAV falling by 38 per cent. The fund has been unfair to its investors as it offers a fixed repurchase price of Rs 200 since September 1995 though the NAV has remained at Rs 250 plus level for most of the period. The fixed repurchase price had also insured that the market price remained depressed despite a high NAV.

To honour its commitment to repurchase units at Rs 300 from September 1998, the scheme has to grow by over 30 per cent. The fund has to repurchase its units at Rs 300 from September 1998.

The fund has to grow at over 37 per cent in the remaining period to honour that commitment. One fails to understand the rationale of promising return based on an equity portfolio. And the fund's ability to honour its promise is entirely dependent on the markets health, which by definition is unpredictable.

Unless it performs, repurchase terms will have to be changed. After Canstar, Magnum Triple Plus, GIC's Big Value and PNB Premium Plus, BOI Double Square Plus in all likelihood will join the list of defaulters. While original unit holders can wait till September 1998 before taking a decision, new commitments should be avoided unless there is a dramatic upsurge in performance.

--Value Research m¬Ut›|=¼Tt›ve failed to exhibit market timing ability.Over the past five years, almost all growth funds, which have provided highest possible returns to the investor, have performed worse than the Sensex. This is one of the arguments in support of indexation. Index funds are designed to meet certain specific requirements of the investor. The rate of return achieved by the fund closely represents that of a given index.Another reason for better performance by index fund is that market index is able to avoid excess risk and obtain consistent returns since it represents a diversification across a fairly wide range of instruments. The strategic argument maintains that in addition to consistent performance, index funds offer efficient use of investment resources.Indexation lessens investment cost in three important ways. First, it minimises brokerage commission and market impact cost by minimising the necessity to transact. Second, when transactions occur, their market impact is minimised because index portfolios are generally invested in securities in proportion to their market rates and the largest investments tend to be in securities with high liquidity. Third, because indexing dispenses with costly asset selection and marketing timing research, managing fees can be significantly lower than those associated with active strategies. Thus, indexation in the long run not only exhibits a better performance but also proves to be a less expensive investment management technique than active management.Indexation is economically desirable as it is efficient for maximising returns to investors and in a fund (such as a pension fund) where many contributors are involved, it minimises contributions for a particular level of eventual return. Index funds do enjoy the power of rock-bottom expense but they are certainly not costless. They involve management costs to be deducted from the NAVs periodically, opportunity cost of cash holdings and cost of borrowing because of changing size of the fund and the cost of investment and disinvestment. It is here that the role of the fund manager is crucial. He has to use his intellect in earning enough to offset the costs and give the investors a market rate of return. Globally, managers use index futures as hedging and liquidity matching tool. However, Indian fund managers are handicapped for now since futures trading is not allowed in India as yet.The concept of index funds is new to India. It has caught attention ever since the launch of the ICICI Index bonds which is based on a similar concept. The ICICI came up with its index bonds last month which was constituted as a discount bond with a detachable index warrant. An investment of Rs 6000 now promises Rs 22000 after twelve years and an additional detachable warrant for an amount calculated as under:Amount to be received = Rs2000 x BSE Sensex at year 2009BSE Sensex at year 1997So, the return to the investor on the index bond would work out to a minimum annualised yield to maturity (YTM) of 11.44 per cent along with an amount on the warrant. Under all circumstances, the investor is assured of a minimum return.The present offer by UTI for index equity funds also provides a safety net. The original investors are given the option to repurchase at par up to 500 units after one year, for a period of one month, should the NAV go below par value of Rs 10. Thus, the investor need not worry about the slide in NAV since the principle is intact. Therefore, one can take a chance without losing much.In fact, for an average investor, an index fund could turn out to be a boon. For one, it eliminates the risk relating to the choice of shares by the investor and the management charges are much lower than that for the managed growth funds. And, of course, this is in addition to the fact that on an average, index funds do better than managed growth funds. However, index fund is appropriate only if you are satisfied with an average rate of return. But if you are expecting above average or extraordinary returns-it is highly unlikely-so forget it. Otherwise you will be in for a big disappointment.–Value Research

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