Why does an investor invest in an equity mutual fund? The primary reason obviously is that he does not want to deal with the hassles of investing in the stock market directly and hence lets "investment expert" i.e. the mutual fund to take the necessary steps.

But there are some problems with this approach. Are mutual funds really "investment experts"? Any investor is an expert only if he constantly gives greater returns than the market.

To explain, the Sensex in the last one year has given a return of 32.74 per cent. For an investor to be labeled as an expert, he would have to generate returns greater than those generated by the Sensex.

Now as far as mutual funds are concerned as per the regulations governing the industry each mutual fund needs to have a benchmark index (such as Sensex). A mutual fund is deemed to have done well when it is successful in generating returns greater than its benchmark index.

This regulation has been put in place to help investors to figure out whether a mutual fund has done well because of the investment abilities of its fund managers or the prevailing market conditions.

Evidence coming out of the mutual fund industry as far as beating benchmarks is concerned isn't really convincing. Burton G Malkiel in his all time classic, A Random Walk Down Wall Street, explains that in the United States, in the entire thirty-year period from 1973 to 2003 "two-third of the funds proved inferior to the market as a whole".

The situation in the last twenty years has been even worse, with more than 85 per cent of the fund managers giving lesser returns than the S&P 500 index, the most broadbased index in the US.

The situation in India is not as bad. In the last one year, almost 50 per cent of the funds failed to beat their benchmarks and that has largely been the case even in previous years.

Investors usually decide on the scheme to invest in by looking at their past performance. But past performance isn't really a guarantee for future performance.

In fact most schemes which appear in the top 10 list of one year, are not in the list the next year. So the point is "how does an investor figure out in advacne which scheme will perform well in the years to come". Well actually he can't.

So what is the way out? The way out is to invest in Index Funds and ensure that you at least get the market rate of return. Index fund is  a mutual fund which invests money in stocks that are a part of a stock market index like Sensex, in the same proportion as their proportion in the index.

This concept of index funds evolved in the United States. Over the years, as fund managers found it difficult to beat the performance of their benchmark indices, they started buying stocks that made their benchmarks in the same proportion.

This inspired John Boggle to start a fund called Vanguard 500, which was an index fund based on the S&P 500 index. Over the years, the concept of investing in index funds has really caught on in the US.

In India, hardly any investor invests in index funds. Having said that, investing in index funds, remains the safest way of investing in the stock markets. One, you are not dependant on the performance of the fund manager. These days many good fund managers leave one mutual fund, to join other. In such cases, it has been found, that the performance of the schemes they have been running suffers.

Two, you don't have to go through a list of 200 odd equtiy funds to figure out which fund to invest in.

Three, you are always assured of the market rate of return.

And four, you don't need to keep track of how well your investments are performing.