An index fund is a mutual fund which imitates the portfolio of an index like the Sensex and Nifty. These funds are called index funds or index-tracked mutual funds because they track an index. In theory you get a performance identical to that of the index being tracked.
Index Which Tracks Nifty: If the index tracks the benchmark like Nifty, the portfolio has 50 stocks that comprise the Index and in the same proportions. Index funds are passively managed funds. Buying and Selling happens in-line with the composition of the underlying benchmark.
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There are several people who don’t like their investments in mutual funds to be managed actively, by a mutual fund manager. They would love their funds to be passively managed. These investors mostly those with low risk appetite prefer index funds.
Index Funds track a particular index and are passively managed. The fund manager decides the stocks to be bought/sold in line with the composition of the underlying benchmark. (Sensex or Nifty). There isn’t a standalone team of research analysts to select stocks and identify investment opportunities.
Index Funds are low cost funds. You can save anywhere between 0.5% to 1.5% each year through an index fund vs actively-managed funds. These savings can be significant over the long term.
Investing in stocks is a high risk- high return game. You could make high profits or suffer heavy losses. Index Funds are not affected by the rise and fall of a single stock or even a sector. You also don’t have the hassles of maintaining a demat account.
See Also: All about Mutual Funds in India
Index Funds replicate the indices like Nifty and Sensex. As there is no active fund management (This constitutes a passive investment), lower costs are passed on to the investor in the form of a lower expense ratio. (Expense ratio is the total cost of the fund).
The index funds follow the set it-forget it strategy. Returns never stray too far from the market.
Active fund managers who beat indices have shown no great consistency in doing so. They are merely lottery winners. Index Funds tend to perform better than actively managed funds over the long term. They are ideal for retirement planning. Index Funds are low cost funds. This translates to a huge savings over the long term.
See Also: Mutual Fund Returns
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