Mutual funds are the most popular investment avenue among investors. It can be justified from the fact that the mutual fund industry has added a whopping 3 trillion to their asset base in 2018 and the uptrend may continue in the coming years.
There are many types of mutual funds available in the market and one of them is Index Funds. They offer an easy, diversified and low-cost way to invest in the stock market. In this article, you will learn about the Index Funds in detail.
Let us begin the article by learning what is an index fund?
What is an Index Fund?
Investors always seek to take advantage of diversifying their portfolio across different asset classes. To do so, index funds are the most popular because they imitate the portfolio of an index like the Sensex or the Nifty. This fund is constructed in such a way that it matches the performance of the financial market index. An investor who has bought an index fund would experience the price moment exactly in sync of the quoted value of the Sensex or Nifty, depending on the fund. Therefore, these funds ensure the performance exactly as the index that is being tracked. One of the main benefits of these funds is its low expense ratio.
Let us now learn how does an index fund work?
How Does an Index Fund Works?
Like mentioned earlier, Index funds basically track the performance of the index such as Nifty. When you purchase this fund, your portfolio will have 50 stocks in the same proportion that comprise in the Nifty. Therefore, an index represents a group of securities of a market segment. In India, the most popular Indices are NSE Nifty and BSE Sensex. The index funds are not actively managed funds because they replicate an index. In actively managed funds, the fund managers keep on looking for opportunities by researching and selecting new stocks. But in index funds, the managers just maintain the composition of an underlying benchmark.
In the case of actively managed funds, the aim is to beat its benchmark while in the case of index funds, the managers try to match the performance of the portfolio with that of the index. Even though the fund managers try their best to match the performance of index fund returns with their portfolio but still there can be some small difference. The index fund managers try to bring down the tracking errors so as to match the index fund returns with the portfolio returns.
Now coming to the most important question that who must invest in the low cost index funds. In this section, we will discuss the same.
Who Can Invest in Low Cost Index Funds?
If you want a predictable set of returns and do not want to take much risk, these low cost index funds are ideal for you. These funds will give you same set of returns as a particular index would. Also, if you want to keep yourself associated with equity funds but not with those funds that are actively managed and bear some risk, these funds are good for you to invest.
Therefore, the first thing to consider while investing in the low cost index funds is determining your financial goals and the amount of risk you are willing to take. In the long run, the performance of the index funds is very good.
Let us now learn how you can invest in the index funds?
How to Invest in Index Funds
Investing in Index Funds is very easy with IndiaNivesh Ltd. Just follow the below mentioned steps to invest in the index funds;
- Visit the website - https://www.indianivesh.in/ and sign in.
- Fill the amount and period of your investment.
- Complete the hassle-free KYC process.
- You can now invest in your preferred index fund amongst the many options available.
Before you invest in index funds, there are a few things that you must consider. Let us see what they are.
Things to Consider Before Investing in Index Funds
It is always advisable to mix and diversify your investments. Index funds are perfect for those who want to take fewer risks. You can reap higher benefits in these funds when the market is in bull mode. When the market enters the bearish mode, you may consider entering actively managed funds.
Index funds aim to replicate the performance of the underlying benchmark. If you are looking for decent returns in the long run, you can invest in the index funds. It is advisable to invest in those index funds that have minimum tracking error.
The main benefit of investing in index funds is the lower expense ratio. The expense ratio of index funds is 0.5% or less while the expense ratio of actively managed funds is 1% to 2.5%. The funds with lower expense ratios always generate higher returns.
If you are looking to invest for your retirement or want to create long term wealth then index funds are ideal for you. These funds can generate good returns in the long run which would be of great assistance in your life after retirement.
Index funds are known to give better returns over a long term of period. You must have the patience to stick to these funds and avoid taking any decision on the basis of short term fluctuations.
On redemption of the index funds, the capital gains are taxable. Your holding period determines the rate of taxation. If the holding period is less than a year, the short term capital gains are taxable at 15%. And if the holding period is more than one year, the long term capital gains over Rs. 1 lakh is taxable at 10% with no benefit of indexation.
The above mentioned are the things that you must consider before investing in the best index funds available in the market. If you looking to invest in best index funds and need any assistance you can contact IndiaNivesh Ltd.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.