Index Funds: Introduction, Benefits & How to Invest


What is Index Fund

The index funds are the passive funds whose expense ratio is 0.10% that is relatively lower than active funds. They are similar to mutual funds because they are both regulated by the fund manager, who determines the fund value. The reasons why investors are showing interest in the index funds is that they are passively managed, and the expense ratio is lower than active funds.

Understand the basic principle of index funds in India with this comparison- Generally, traditional mutual funds are active funds; it implies that a fund manager chooses the stocks and invests Money of the investors. Whereas in index funds, fund managers invest your money on a variety of assets that function under the single market. Here a fund manager only buys the stocks that relate with the configuration of the Index he is tracking.

When you invest money in the index funds, you are gaining the advantages of portfolio diversification, low operating expenses, and broad market exposures.

How Index Funds Works?

The index funds are a collection of assets that defines a market segment. These assets are bonds and stocks. The best index funds in India are NSE and BSE Sensex. The duty of the fund manager to buy/ sell the stocks that composition match with the Index he is tracking.

Let’s understand the operation of index funds with this example- S&P is 500, so a fund manager will only invest the money on the stocks to mirror the stocks within the S&P 500. For example, companies like Flipkart and Amazon stocks value is 25% of the S &P Index, an index fund tracking will invest the Money in those companies stocks account for 25% index fund value.

The major difference between the active funds and passive funds is that a fund manager tries to beat its benchmark in active funds. Whereas in the passive funds he tries to buy/sell stocks underlying the benchmark of index tracking.

If you invest your money in the best index funds in India, the return of the investment you will get is more or less to the benchmark.

Benefits of Investing in Index Funds

Investing in index funds is one of the most popular investment avenues. Due to passive investment nature, many investors prefer to invest Money in the Index funds.

Following are the benefits of investing in index funds-

Diversity of Funds: A index market seeks to capture a wide market segment so that investors can invest in diverse financial instruments. It is the best for the investors who want to invest money in a variety of stocks and bonds.

International Market: Investors of India can experience the exposure of investing Money on the stocks and bonds of foreign countries.

Market Capitalization: The index funds are the best options for the long term investors who want to fill their baskets with the variety of stocks and bonds of the small, mid, and large companies. The return of the investment you will get is remarkable.

Earning based: There are two index funds associated with market value index funds and growth index funds. The companies that are expected to grow quickly create Growth index funds. Whereas value index funds are the stocks that are traded at low cost compare to the earnings of the businesses.

Investment in the best index funds in India is far easier than active funds. On investing in various stocks and bonds, you not only decrease the risk of losing money in the investment but also enhance the diversification in the investment portfolio.

Things to Consider as an Investor

  • Risk Tolerance

    Best index funds in India are associated with less risk. However, the value of index funds decreases if the market slows down. So it is advisable to create your portfolio that contains both active funds and index funds to manage the risk of losing money. A diverse portfolio that contains both active and passive funds offers you a high return of the investment.

  • Return Factor

    If you invest money in the best index funds, you can track the underlying benchmark passively. Due to tracking errors, the return doesn’t match the expectations. Hence, it is advisable to invest the money on the index funds that are associated with minimum tracking errors.

  • Cost of investment

    A fund manager will charge an expense ratio from the investor that is 0.5%, which is relatively lower than active funds expense charges. A portfolio of the index funds is managed passively and doesn’t require a lot of strategies. If you invest in the two indexes of the nifty, both will generate the same return of the investment. And most importantly, the fund which has a lower expense ratio generates a better return of the investment.

How to invest in the index funds?

Investing in the best index funds India is one of the simplest and easiest ways to take steps in the stock market world. Due to the low expense ratio, high return of the investment, low risk, and diverse portfolio it is one of the best investment options for the new investors.

If you are willing to invest in the best index funds and want to know the process, then continue reading.

You have got the full liability to choose the best index funds and manage it passively. Either you can invest in the best index funds via offline mode or online mode.

Online Investing

  • Sign-in at the best fund manager site.
  • Share your investment goals and risk tolerance with him.
  • Once he gets your trading goals and risk capacity, he will pick the stocks that match with the underlying benchmark.
  • A fund manager will charge an expense ratio from you that is 0.5%, respectively, and the return you will get from the investment directly comes at your account.
  • You can also manage your portfolio passively anytime via online trading platforms, through Desktop or Mobile Apps.

Offline Mode of Investing

if you are not confident enough in handling trading apps or manage Money by yourself passively, then you can choose an offline mode of investing. However, if you prefer to invest in the index funds via broker offers your different return of the investment and varies expansion ratio. If you wish to invest in the best index funds of India independently, then visit the nearest AMC office of your city and don’t forget to make a list of following documents with you-

  • Identity proof
  • Canceled cheque
  • Passport size photos
  • PAN Card
  • KYC documents

You may Also Like to read: Unexplored Benefits of Investing in Fixed Deposit


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