Equity Fund vs Index Fund
Do you know? Based on the investment portfolio, there are four mutual funds: money market fund, fixed income fund, equity fund, and balanced fund. But, have you found an equity index fund when you want to subscribe equity fund? Equity index fund usually contains “IDX30”, “Index Fund”, or “Sri Kehati” (SRI-Kehati index) in its name.
“So, what is the difference between equity fund and equity index fund?”
An equity fund contains a pool of funds from investors invested by the fund manager in money markets, bonds, and at least 80% in stocks. Meanwhile, equity index funds invest at least 80% of stocks that are part of the index. Let’s take a look at the illustration of an equity index fund portfolio below:
In the equity index, fund managers must invest at least 80% of the mutual fund’s Net Asset Value in stocks on the IDX30 equity index. The IDX30 equity index consists of 30 stocks with high liquidity, large market capitalization, and supported by good company fundamentals.
Another difference between equity funds and equity index funds is the portfolio strategy managed by the fund manager. In managing an equity fund, the fund manager actively selects stocks that become the investment portfolio’s composition actively to beat the benchmark. On the other side, the fund manager’s equity index fund is passively managed by compiling an investment portfolio that follows an equity index. An equity index is a statistical measure that reflects the entire price movement of a group of stocks selected based on certain criteria and methods. Examples of equity index funds are BNI-AM IDX30 Index and IDX30 Principal Index. As the name implies, these two index funds are managed by fund managers to resemble the performance of the IDX30 stock index.
Considering the different ways of arranging the investment portfolio, choosing an equity index fund is different from choosing an equity fund and other types of the mutual fund. When choosing an equity fund, you must ensure that the mutual fund’s performance is above the benchmark. Meanwhile, when choosing an equity index fund, you must ensure the tracking error is low. Tracking error measures the difference between the performance of an index fund with a benchmark.
Here are two other components that differentiate an equity fund from an equity index fund.
- Management fee
The cost of managing equity funds is higher than managing index funds because the equity fund investment portfolio is actively managed.
Since the equity fund’s objective is to beat the benchmark, which is Jakarta composite index or JCI (IHSG in Bahasa), the equity fund can generate a return above the JCI.
Seeing that there are differences in strengths and weaknesses between equity funds and equity index funds, it would be wise for you to diversify your portfolio to optimize your investment return or minimize the risk.