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Index Funds

Namaste and Welcome to Coverfox! Have you ever wanted to diversify your investment portfolio but felt the choices were too narrow? Are you constantly looking for an alternate investment vehicle within Mutual Funds? Well, we have the right investment choice for you.

This page has been created to help readers, and possible investors, understand the value of Index Funds. This page has important information regarding the Fund’s features, benefits, and types - all of which will help you make a solid decision on investment.

What are Index Funds?

These funds are investment tools that help you invest in the wider market indices like Nifty and Sensex. The value of the fund is correlated to its benchmark index. This means that the performance of the funds is identical to the performance of the indices it tracks.

The NAV (Net Asset Value) fluctuates as per the rise and fall in the index. These funds are passive - which means they do not need to be managed actively, unlike Mutual Funds. Thus, this fund follows an ‘invest once and forget’ principle.

The popular advice, “Do not put all your eggs in one basket” applies best when it comes to these investments. Most investors know the benefits of diversifying their portfolio.

Why should I invest in Index Funds?

  • Low Operating Cost: Index funds have a low expense ratio as they do not need to be actively managed by the fund manager. Fund Management: There are no chances of error of judgment or poor management resulting in a loss for the investor as they are not managed actively.
  • Economist Support: Need help with the fund? Don’t worry, take assistance from the resident economist, who will guide you better than a fund manager or fellow investor in the long run. They also advise on price errors of stock, amended as per fundamental value.

How do Index Funds work?

An index group is a group of securities which define a market segment. These securities can be equity-oriented or debt-oriented instruments like stocks. The popular indices in India are NSE Nifty and BSE Sensex stock indices.

Index funds align themselves to a benchmark of Indices (e.g., Nifty) and its portfolio will contain 50 stocks in the exact same proportions that comprise the indices.

Since index funds track a respective index, they do not need to be managed actively and hence, fall under passively managed funds. The fund manager only has to decide which stocks need to be purchased or sold as per the composition of the underlying benchmark. There is no need to have a team to research and identify stocks to select. The goal is to match the performance to its particular index. Tracking errors - the difference between the index’s and the fund’s performance - need minimization. This is done by the fund manager.

How to Invest in Index Funds?

Thanks to the penetration of the internet and digital platforms, it has become easier to invest in these funds! The process is as follows:

  • Sign in to the online portal of your choice
  • Fill the necessary information like your personal details regarding the amount of investment and duration of the investment
  • Get your e-KYC done through online verification
  • Choose and invest in your preferred index fund from amongst the hand-picked mutual funds.

Who Should Invest in Index Funds?

The decision to invest in a fund solely depends on you! It’s your hard-earned money after all. Yet, it is also our duty to guide you on several investment tools present in the market. Think of us as your friendly neighborhood advisor.

The decision to invest in a particular fund depends on the risk-taking capacity of the investor and his or her investment goals. You should invest in these funds if:

  • You are someone with low-risk capacity
  • You want stable and predictable investment returns
  • You do not want to actively manage your investment portfolio on a day to day basis

Pro Tip: Index funds match - and even exceed - returns of actively managed funds (e.g., Mutual Funds) on a short term basis only. Actively managed funds are better on a long-term basis.

Best Index Funds in India in 2020

Below are some of the Best Index Funds in India for the year 2019

Fund 1 year return 3 year returns 5 year returns
Motilal Oswal Nasdaq 100 ETF (MOSt Shares NASDAQ 100) 55% 31% 23%
Aditya Birla Sun Life Gold ETF 33% 20% 14%
Invesco India Gold Exchange Traded Fund 32% 20% 14%
Nippon India ETF Gold BeES 32% 20% 14%
Axis Gold ETF 32% 20% 13%

FAQs on Index Funds

Are index funds safe?

BSE Index has over 500 companies listed and over 200 mutual funds schemes and for an investor picking up the right investment is a daunting and tough task. All mutual funds are trying their best to achieve returns which are better than the index performance and achieving this is not possible always, especially in the long run. An index is an ideal investment choice for an investor who doesn’t have much knowledge of the financial market. The expense ratio of the index fund is very less as it is passively managed and does not require a team of an analysts to manage it. This ensures a good return in the long run and makes it a safe bet for an investor.

Can you lose money in an index fund?

Index funds imitate the portfolio of an index. The returns are based on underlying stocks which are part of the index. Hence, if the performance of the stock listed on the Sensex is bad, it will directly reflect on index funds performance. However, the benefit of index funds is an average of 30, 50 or 100 stocks as per the Indices and hence, the volatility factor is low compared to stocks. Therefore, the chances of losing money can happen only if the investor invests for a short period. It has been observed that if the investor invests for long terms like 5 years or more, the chances of occurring losses are very low.

How do I invest in index funds?

Investing in index funds can be done through online platforms today, without the need for paper documentation. It is easy and convenient and can be done by sitting at the comfort of your home. The KYC verification can also be done online through Aadhaar card and PAN card.

How much does it cost to invest in an index fund?

The expense ratio of index funds is normally around 0.5% as compared to actively managed funds that have an expense ratio between 1% to 2.5%. The reason behind the low expense ratio is that the portfolio of the index fund is passively managed and the fund manager does not need to make any investment strategy. Hence, investing in an index fund is cost-effective and this also results in better returns for the investor.

What are the advantages of investing in an index fund?

The advantages/benefits of investing in an index fund by an investor are:

  • Risk factor is low
  • Low expenses ratio
  • Consistent returns

What are the best ETFs to invest in 2019?

The best ETFs to invest in 2019 are as below -

  • UTI Nifty ETF INR (4 Start)
  • Edelweiss ETF – Nifty 50 (4 Start)
  • UTI Sensex ETF INR (4 Start)
  • Reliance ETF Sensex (4 Start)
  • SBI ETF BSE 100 ETF (4 Start)

What is an example of an index fund?

Most index funds track the benchmark indices Sensex and Nifty in India. The Nifty Next 50 is also a popular index. It is an index of the 50 major stocks that follow the Nifty 50 stocks. The Nifty Value 20 (NV) Index is another well-known index for trackers.

What is an index fund and how does it work?

An Index Fund is a mutual fund which puts investment in a market index such as the Sensex or Nifty 50. The fund invests in index stocks, in the proportion in which they are present in the index. It thus seeks to mirror the performance of an index.

What is best index fund to invest in?

Below are some of the best index funds to invest in the current year.

  1. UTI Nifty Index Fund Regular Growth
  2. HDFC Index Nifty 50
  3. SBI Nifty Index Fund.
  4. ICICI Prudential Nifty Next 50
  5. Franklin India Index Fund NSE Nifty Plan Growth

What is the average return of an index fund?

Any fund experiences a lot of volatility during the short-run which averages out in the long-run period, say, more than 5 years in order to give returns in the range of 10% to 12%.

What is the difference between a mutual fund and an index fund?

Index funds are a subset of mutual funds. A mutual fund pools money from different investors and invests it together using a certain strategic financial return goal. On the other hand, index fund is a mutual fund whose strategy is to mirror an index like NSE Nifty or BSE Sensex.