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Least cost & passive way of investing in Stock Markets. These funds are based on an underlying index like NIFTY, SENSEX, etc. and simply mirror the returns of that index. Index Funds are the most advocated way to invest by legendary investors like Warren Buffett for retail investors. Free from Fund Managers' biases, this list gives you a truly automated equity portfolio of top companies.
An index fund is a type of passively-managed mutual fund that tracks and attempts to replicate the performance of a market index such as the NIFTY 50, NIFTY Next 50, Sensex, etc. To replicate the performance of its chosen index, Index Funds hold the shares that comprise the chosen index in the exact same proportion as the index being replicated. In order to better understand how Index Funds work, let's discuss what active management and passive management mean in the case of Mutual Funds.
In an actively managed Mutual Fund, you invest your money in a scheme and then an expert called the Fund Manager uses his or her expertise to build a portfolio of securities. The fund manager and his/her team take tactical calls including which stocks to buy or sell and at what price. This style of investing often involves multiple buy and sell transactions, so, is called active investing, and schemes implementing this strategy are called actively managed mutual funds.
In passive investing, the Fund Manager builds a portfolio of stocks and maintains individual stock allocations in the same proportion as the index being replicated. So, unlike active investing, the fund managers engaged in passive investing are not free to pick and choose stocks to invest in. Instead, they can only replicate the portfolio of the chosen index. Index Funds that replicate specific indices like the NIFTY 50, NIFTY Midcap 150, etc. follow this strategy and are examples of passively managed Mutual Funds.
When you invest in an index fund, the fund manager of that index fund uses your money to invest in stocks in the same proportion as the index that he is tracking.
For example, a NIFTY Index Fund invests in stocks of companies comprising the NIFTY 50 Index in the same proportion and aims to achieve a return equivalent to the NIFTY 50 Index. For example, as Reliance has a 10.3% stake in the NIFTY 50, the fund manager of a NIFTY Index Fund will build a portfolio where the weightage of stocks of Reliance company will be 10.3%. Similarly, stocks of other companies will be held in equal proportion as the index.
If a stock's weightage has increased or decreased in the index, the fund manager of an Index Fund will also replicate those changes in his fund. If a stock is removed from the index and new stock is added in its place, the fund manager of the Index Fund will sell all his holdings in the stock that has been removed and buy the new stock in the same proportion as it is in the index.
Since these funds don't have a team to manage them and they don't buy and sell stocks actively, their cost structures are really low. As a result, index funds are the cheapest mutual funds you can invest in.
Passively managed index funds can be useful for investors who want to keep their equity investment simple or those who do not want to select top-performing fund managers, etc. Here is a list.
Index Funds have grown in popularity in India as they offer a number of benefits over more traditional actively managed funds. While a significant number of investors still invest primarily in actively managed funds as they have the capability of providing higher returns than the benchmark index, the following are 3 key reasons why Index Funds in India are gaining popularity:
No Fund Manager Bias
In the case of an Index Fund, the fund manager only replicates the index that is being tracked, so, there is no bias with respect to stock selection in this case. For example, an Index Fund tracking the NIFTY Next 50 Index will only invest in the 50 stocks that comprise the Next 50 Index. Moreover, the individual weight of each stock in the Index mutual Fund will be the exact same as their proportion in the NIFTY Next 50 Index. As the fund manager does not have to select and invest in stocks by himself/herself or have to time entry and exit into individual stocks, there is no risk of personal bias.
Low Cost of Investment
Managing even the best Index Fund does not require a team of analysts to research best possible investments or determine market trends to determine the ideal time of entry and exit into individual stocks. Thus, the cost of managing an Index Fund is significantly lower than that of an actively managed Equity Mutual Fund. Moreover, even the top index funds in India do not have engage in active trading, which reduces portfolio churn and leads to a lower expense ratio of the Index Funds compared to an actively managed scheme.
Indices typically comprise a basket of stocks that are diversified across multiple sectors and there are also limits to the exposure to individual stocks that an index can have. As the portfolio of an Index mutual Fund replicates the chosen index in every respect, these schemes offer investors diversified investments across multiple sectors and minimal concentration risk. Actively managed funds are often not able to deliver such a high degree of portfolio diversification at such low costs.
You can invest in an index fund just as you invest in any other mutual fund scheme. Follow these steps:Explore now
Install the ET Money app on your mobile and login to open the App
Click on the "Find Funds" option to select the index fund you wish to invest in. You can also directly search for it on the search bar at the top.
You can do a lump sum investment in index funds or you can start a SIP as well.
You can instantly invest in the fund by making the payment either through Net Banking or using UPI ID
There is nothing called as Best Index Fund. To pick an index fund you first need to decide where you want to invest. For instance, if you want to invest in India's biggest companies, the index will be SENSEX or NIFTY 50.
Next look for funds that track that particular index. Among the options go with the one with the lowest expense ratio.
Yes, you can lose money in an index fund as they are market-linked products. But historic data shows that if you stay invested for the long term, the risk of losing money in index funds is almost negligible.
To start with, allocate 10-15% of your portfolio to Index Funds. This will give a good balance of passive and active investments.
Most Index Funds in India don't have Dividend Plans. The ones that do have, the frequency has not been very consistent.
For most investors, Index Funds are a better option than buying individual stocks. They give you a cost-effective way to take exposure in the entire market. Plus the risk is lesser as you have a diversified portfolio and not just a few stocks.
An index fund attempts to imitates the performance of its chosen index by investing in the same stocks in the exact same proportion as its chosen index. So, the returns you can expect from even the best Index Funds in India will be close to but lower than that of its chosen index.
The period you need to stay invested in an Index Fund will be determined by the type of index that the scheme is tracking. If you have invested in an index mutual fund that tracks an Equity-oriented index such as the NIFTY 50 or NIFTY 100, you have to stay invested for the long term i.e. over 5 years. This way your investments will get sufficient time to grow.
The fund manager in an Index Fund must invest in all the stocks in the same proportion as it is in the index. So if the index has only limited stocks or one stock has higher weightage, then the portfolio might not be optimally diversified.