Index funds have been popular for many years worldwide. They were created to meet the demand for broader diversification and lowered risk of investing on the stock exchange.

According to the theory of the effective markets, investors cannot beat the market in the long-term perspective. Meanwhile, investing in such funds proves to be much cheaper in terms of fees and commissions of setting up an individual portfolio.

The theory basically states that higher return can only be generated by insider trading, which is, of course, illegal.

The Bulgarian market is still not effective, but investors are expecting this to change in the near future. Still, we can say that the average return investment funds reach does not exceed the level of indexes.

Only one index fund operates on the Bulgarian market presently – this is Alfa Index Top 20 (originally called Alfa Index Top 15), which becomes one year old today.

„The idea of setting up an index fund emerged 2 years ago, when research revealed that the return of mutual funds back then did not beat the increases of SOFIX and BG40,“ says the fund's portfolio manager Petar Vassilev.

„These funds provide safety of investments and give investors the chance to be part of the market without worrying whether their money is managed in the best possible way,“ Mr. Vassilev also points out.

The problem with SOFIX is the relatively subjective selection of the companies included in its calculation. Since it is calculated on the basis of market capitalization, the weight of big companies significantly exceeds 10%, which automatically makes it unsuitable for an index fund according to regulatory requirements.

As for BG40, there are too many companies included in its calculation for a low-liquidity market as the Bulgarian one, moreover, the stock of some of them is traded relatively rarely and could be manipulated easily. Analysts in Alfa Index also say that in this case it is impossible to avoid tracking errors.

The broad indicator is also price-weighted, which means it is easily affected by companies with higher absolute value.

This is how the idea for a new index emerged – an index that would represent the market movement better, free of subjective influence, and thus, more suitable for using it at as a basis for an index fund.

This is not a new idea to the world. The most popular indexes have been established by independent information companies, such is the case with Dow Jones and S&P in the USA, FTSE in Great Britain, and NIKKEY in Japan.

Alfa Index's managing fees are among the lowest on the market – 1% a year, and transaction fees stand at just 0.25%.

Alfa Index is the first fund which offers its clients the opportunity of acquiring stakes on-line. This is not only more convenient for investors, but cheaper in terms of costs on establishing their distribution network.

„This idea was very well received by investors and only a few months after it was launched, more than half of our new clients were using the Internet to acquire shares,“ Mr. Vassilev also said.

Alfa Asset Management, which controls Alfa Index Fund, is planning to invest in software development in order to achieve complete automation of the fund's administration.

The fund has achieved 75% profitability since public offering started, which ranks it among the best funds in the country.