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Index Funds in India: How to Invest in Index Funds? Research Team | Posted On Wednesday, October 30,2019, 02:45 PM

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Index Funds in India: How to Invest in Index Funds?



What are the Index Funds?

An index fund is a type of mutual fund that creates its portfolio by tracking the composition of the standard market index like Sensex or Nifty. The corpus of index funds is usually invested in stocks constituting the underlying index in the same proportion as in the index. An index fund can be purchased just like any other mutual fund. You can purchase it from a fund house and later redeem it. Sometimes, index funds hold the units of the corresponding ETF belonging to the same AMC and sometimes they directly hold the stocks included in the index.

One of the key benefits of an index fund is that it allows investors to invest their money in global stocks without having to invest them individually. This is one of the good options to diversify one’s investment portfolio. Since the index funds are passively managed, its key USP is the low expense ratio that helps investors to generate better returns in the long-run.

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How Does the Index Funds Work? Who Should Invest in Index Funds?

Index funds are passive in management which implies they are not actively traded or adding investments. Investments funds are automated to track with a benchmark index like nifty and so the investment mix depends upon the underlying index. Index funds are the safest mode of investment for retail investors who have limited knowledge about the share market. Investing in Index funds like Sensex or Nifty is similar to investing in India's Economy because the stocks listed in these indices represent India. Since the index funds are managed passively by fund managers the expense ratio is low when compared to actively managed funds.

Index funds are a group of securities defining a market segment. These funds are designed to track the returns of a market index. Since they track a particular index the index funds are categorised as passively traded funds. The fund manager decides the buying and selling of stocks according to the composition of the underlying benchmark. Index funds do not conduct research unlike actively traded funds rather they just track the index. Lesser research means lesser expanses ratio as the fund manager has minimum work to do.

See Also: Index Funds Vs ETFs

How to Invest in Index Funds?

The process of investing in index funds is easy. It carries minimal documentation and is completely online. This reduces your time and helps you in hassle-free investments in index funds.

To start investing in index funds you will have to open an online account with a brokerage firm:

  • Sign in to the brokerage firm of your choice
  • Enter details regarding the amount of investment and the time period
  • Submit your KYC details and get verified within a few minutes
  • You can start investing instantly
  • Choose your favourite index fund from the best handpicked mutual funds.

See Also: Are New Sebi Rules for ETFs, Index Funds Good for You?

Benefits of Investing in Index Funds:

  • Low cost: The expense ratio of an index fund is lower than actively traded funds as they are managed passively. While you may have to pay anything from 1% to 2% as TER for an actively traded fund, index funds would charge you in the range of 0.20% to 0.50%. The cost difference will help the investors generate significant returns in the long run.
  • Diversification: In terms of market capitalization the index funds include top companies. This means the market leaders across the sectors will be a part of the benchmark index. The automatic diversification will allow investors to reduce risk as they no longer have to remain invested in a particular stock or sector.
  • Lesser losses: Since the allocation of assets does not depend on the preferences of the fund manager; the scope of incurring losses reduces. In index funds the chances of loss due to inefficient asset allocation or poor asset management by the fund manager in low.

See Also: Everything You Need To Know About Mutual Funds

Disadvantages of Index Funds:

Market Underperformance: Investors investing in index funds do not have the chances of beating the market by choosing an actively traded fund. In case of a country like India which is still in its developing stage, data shows that a well managed actively traded fund can generate more returns than a passively traded fund.

Mature Companies Only: The index companies are mature companies who have already left their best growth years behind. Investors of such funds are not able to benefit from the high growth potential of the small and midcap companies.

Expensive Valuations: Investors prefer buying stocks that are already expensive from the valuations perspective.

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