Today, investors are always on the lookout for investment options that can help in diversifying their portfolios. Index funds are the latest entrant as they allow investors to follow broader market indexes such as Sensex or Nifty. An index fund is a type of mutual fund which aims to mirror the portfolio of a chosen index. Index funds are also referred to as index-tracked mutual funds.
The stocks included in an index will be included in an index fund and therefore, in an investor’s portfolio. The objective of an index fund is to replicate the performance of the index that is being tracked. Most investors are attracted to index funds due to low expense ratios since these are not actively managed.
Index funds can help an investor manage his risks well since they do not aim to outperform the market but stay in parallel to the index as far as returns are concerned. For investors who are considering an investment in index funds, here is all the information needed, specifically on how to invest in index funds in India.
Index funds are a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500). They are designed to provide broad market exposure, low operating expenses, and low portfolio turnover.
In simple words, index funds are a way to invest in a diversified portfolio of stocks or bonds that mimic the composition and performance of a financial market index. They have lower expenses and fees than actively managed funds and follow a passive investment strategy.
The major benefits offered by index funds are as below:
Because these are passively managed, the total expense ratio (TER) for any index fund is less than actively managed funds. An actively managed fund can have an expense ratio of 1-2%. An index fund will charge an expense ratio between 0.20% to 0.50%. While this may seem like a tiny cost difference, in the long run, it can be closer to 15% of total returns.
An index fund mostly comprises stocks of top companies from a market capitalization stand-point. This is because most leading market players are a part of the benchmark index chosen. This diversification across multiple market-cap categories allows an investor to minimise the risk of staying invested in a few chosen stocks or a particular sector.
Since the asset allocation in an index fund is automatic as per the index’s composition, the fund manager’s involvement is limited. This minimises losses caused by inefficiency in asset allocation.
Index funds are liquid investments and allow investors to liquidate their funds during the investment period as they are basically mutual funds that invest in the index. An investor can always redeem the index funds and the fund management companies will pay the amount back after deduction of exit load if any. This is better than ETFs where you will have to find a buyer for your units.
Mentioned below are the documentation requirements and primary ways of investing in an Index fund.
Here is the list of documents required for an index fund investment:
Index fund investments can be made through either SIP (systematic investment plan) mode or via lump-sum investment.
Index fund investment is easy since it does not require the opening of a Demat account. You can invest in index funds using any of the below-mentioned ways:
Listed below are some important aspects to be considered before making an investment in Index funds:
End Note
Investing in an index fund is easy. All it requires is careful consideration of investment strategy, choosing an index fund, and following the documentation to begin the investment.
Which is the best index fund to invest in India?
Depending on an investor’s investment strategy, there are various index funds available in the market. Investors must carefully consider aspects such as market-cap focus, expense ratio, tracking error, etc before picking an index fund. Use the Fisdom app to invest in some of the best index fund options.
How can I invest directly in index funds?
You can invest in an index fund by either approaching the AMC office of the chosen fund or you can invest through Fisdom app, which has an easy-to-follow investment process. You can also approach a broker to initiate the investment process.
How much should I invest in index funds?
Index fund investment should be made as part of a diverse portfolio of investments. Depending on your financial capability and specific goals, you can make index fund investment with small amounts through SIP or opt for a lump-sum investment.
What are the advantages of index funds?
Index funds offer various advantages like lower expense ratio, investment diversification, liquidity, efficient asset allocation, etc.
Do index funds involve fees?
Index funds have lower management and transaction fees as compared to regular mutual funds, because these are passively managed. Also, these do not require constant revamp of stock portfolio because the strategy is to mirror an index’s stock composition at all times. This results in comparatively lower transaction fees.
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