Finance

WHAT ARE INDEX FUNDS? ARE THEY GOOD FOR INVESTING?

Growing concerns about the ability of fund managers to generate optimum returns on mutual fund investments are prompting the investors to consider passively managed funds, such as index funds increasingly. This blog will cover everything you need to know about index funds in India and analysing if they are worthy enough for your attention.

What is index fund?

Index mutual funds imitate a stock market index like BSE Sensex, NSE Nifty, etc. These mutual funds are passively managed funds meaning that the fund manager invests in similar securities having similar proportions as in the underlying index it follows.

How do Index Funds work?

As index funds track a particular index, they fall under passive fund management. Under passive fund management, the securities traded rely on the underlying benchmark. Hence, passively managed funds do not need a dedicated team of research analysts to identify new opportunities and pick the most-suited stock.

Contrary to actively managed funds that strive continuously to time and beat the market, index funds are designed to match the performance of its underlying index. Thus, index funds returnsare aligned to their underlying stock market index.

The returns are more or less equal to the benchmark, except a minor difference known as tracking error. The fund manager often strives hard to dial down this error as much as possible.

How to invest in index funds?

If you are wondering how to buy index funds, it’s quite simple. Just follow these easy steps:

  1. Pick the market index that you wish to track
    There are various types of indexes for an investor to track. The most common index funds India include Sensex and Nifty 50. In addition to these broad indexes, you can also find sector indexes which are tied to a specific industry.
  2. Select mutual funds that track your underlying index
    Once you’ve selected an index, you can usually find at least 1 index fund that tracks it. For popular indexes like Nifty 50, Sensex, you might be showered with a dozen or more choices all tracking the same index.
  3. Purchase shares of that index
    To buy shares of the chosen index fund, you can generally open an account directly with the company that offers the fund. Alternatively, you can also open a brokerage account that permits you to purchase and sell shares of the index fund you’re interested in.

Index funds have the potential to save you a significant amount of money and also lay a good foundation for your future. Owing to SEBI’s (Securities and Exchange Board of India) recent re-categorisation of mutual fund schemes, numerous financial planners strongly believe that index funds Indiais likely to make their presence felt among various investment havens in the future. Happy investing!

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