What are index funds?

Mutual funds are one of the most preferred investment instruments in India, which offer different schemes with their own advantages and disadvantages. However, investors choose the mutual fund type for investing their money based on their investment goals and personal circumstances. There was a time when many investors in India preferred actively managed funds to invest their money without even considering passive funds like index funds. However, their preference for investment has changed over time, and nowadays, many people choose index funds to invest their money. Read this post to get an idea about what index funds are.

Index funds

Index funds are a type of mutual fund, but they are treated as passively managed funds.  The difference between an actively managed fund and index fund is that in the former case, the portfolio manager chooses investments after analyzing each of them to beat the market. But in a passive managing fund like index funds, the portfolio manager purchases almost all the holding in the index in order to replicate the underlying shares listed in Sensex/Nifty to match the returns of the index that follows. In this type of mutual fund, the managers tracking the composition of the standard market index like Nifty or Sensex to create a portfolio for their investors.

How Index fund works

An investor can buy index funds from a fund house just like any other mutual fund and can redeem it later. The best advantage of investing in this fund is that it allows you to invest your money in global stocks. There is no need for you to invest your money individually to get a great portfolio.  Investors prefer to invest in index funds as it can make more returns than many actively managed funds in the long run with a low expense ratio. The peculiarity of such funds is that they are not actively made or traded investments.

The working of index funds mainly depends on an underlying index. In fact, these funds are programmed to track a particular index like Sensex or Nifty. The fund managers match the performance of its index and buy or sell the stocks based on this underlying benchmark. Most of the stocks listed in index funds are government securities, and investing in this fund is somewhat like investing in for the progress of the Indian economy.  Every mutual fund scheme tries to be the best in the market and beats the index returns.  By investing in this fund, an investor can balance the risk in his or her portfolio.

Advantages of investing in Index funds

Low expense ratio: The expense ratio of index funds is relatively low as these funds manage passively. You need to pay even a less expense ratio of around 0.5% to manage this fund while you need to pay around 1-2% for actively managed funds.

Diversification:  Since the benchmark index of index funds includes many top companies, investors are no longer required to invest only in a particular stock. A diversified portfolio is certainly an attractive feature of index funds. The automatic diversification also helps investors to reduce the risk factor associated with such funds.

Reduced chances of losses: The chances of incurring losses are relatively low in index funds because of the allocation of assets in them are not entirely based on the interests of fund managers. The losses due to low-quality asset management or poor asset allocation by the fund manager are low in index funds.

Index funds do not allow investors to beat the market by opting for an actively managed fund. However, consider a few things before choosing in index funds like its return factors, risk tolerance, cost of investment, investment horizon, and tax efficiency. So, choose index funds if you would like to achieve good returns over the long-run by saving money on fees.

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”, so let me do Nivesh