In This Article, You Are Going To Learn About What Is An Index Fund ?, How Index Funds Works, Advantages And Disadvantages Of Index Funds, Index Funds vs ETFs And Mutual funds, Index Funds Or Actively Managed Mutual Funds, Where To Invest ?.
If You Are An Investor Who Wants To Diversify Your Portfolio With Average Returns And Minimum Risk Compared To Active Mutual Funds Then The Index Funds Are For You.
List Of Content :
- What Is An Index Fund
- How Do Index Fund Works
- Who Should Invest In An Index Fund
- Difference Between Index Funds And ETFs
- Index Funds vs Mutual Funds
- Advantages And Disadvantages Of Index Funds
- Index Funds Or Actively Managed Mutual Funds, Where To Invest ?
What Is An Index Fund ?
Simply Index Funds Are Funds That Track A Market Index Such As Nifty 50 Or Sensex Are Known As Index Funds.
Index Funds Are Also A Type Of Mutual Funds Known As Index Mutual Funds.
Index Funds Are Not Actively Managed Funds, These Funds Are Passively Managed Because The Funds Are Directly Invested In Particular Indices.
As These Are Passively Managed The Expense Ratio Is Lesser Compared To Actively Managed Mutual Funds.
How Do Index Funds Work ?
For Example, If The You Are Investing In the Nifty 50 Index Fund, The Funds Are Equally distributed To All The Stocks In That Index As Per Their Weightage In the Index.
As Nifty 50 Increases Your Returns Will Increase And Vice-Versa.
Index Funds Typically Deliver More Or Less Returns Then An Index. There Can Be Small Difference Between Fund Performance And Index. This Is Known As Tracking Error. The Fund Manager Needs To Work To Bring Down The Tracking Error As Much As Possible.
Tracking Error Includes Management Expenses, Cost Of Buying And Selling Stocks And Sometimes The Total Fund Available Is Not Invested In Index Funds, Because The Fund Manager May Be Waiting For Better Opportunity. These Are The Some Reasons Of Tracking Error.
Who should Invest In An Index Fund
If You Are An Investor Who Wants To diversify Your Portfolio With Average Returns And Minimum Risk Compared To Other Actively Managed Mutual Funds Then The Index Funds Are For You.
Because The Index Funds Simply Track An Index, So The Risk Is Very Low Compared To Actively Managed Mutual Funds. At The Same Time, You Will Get An Exposure To Every Stock That Is In The Index Which Will Diversify Your Portfolio And Minimize Your Risk.
For Long Term Index Funds Are Best With Low Risk.
Index Funds vs ETFs
Index Funds Tracks An Index And Most Of The ETFs Also Tracks An Index. But The Main Difference Is ETFs Are Traded Like Stocks On Exchanges, Where As Index Funds Are Not Traded On Exchanges.
ETFs Are Traded Like A Stock On An Exchange, Whereas Units Of Index Funds Are Issued Like Any Other Mutual Fund.
To Invest In Index Funds Demat Account Is Not Required, But For ETFs Demat Account Is Requires As We Are Buying Through Exchanges.
Index Funds Have One Day Settlement Time, Where As ETFs Have 3 Days Settlement Time.
This Is All About Index Funds vs ETFs
To Know More About ETFs READ HERE.
Index Funds vs Mutual Funds
Firstly Index Funds Are Also A Type Of Mutual Funds, Known As Index Mutual Funds.
But Index Funds Are Passively Managed And They Track An Index. So Index Funds Cannot Outperform Or Underperform The Index.
Mutual Funds Are Actively Managed, That Means Fund Manager Will Actively Manage These Funds. Actively Managed Mutual Funds Can Outperform Or Underperform The Index. Because These Funds Are Not Tracking An Index Like Index Funds.
Expense Ratio Is Higher In Actively Managed Mutual Funds Then Passively Managed Index Funds.
Advantages And Disadvantages Of Index Funds
As Index Funds Track An Index The Risk Is Very Low In Index Funds.
By Investing In Index Funds We Can Diversify Our Portfolio.
As Index Funds Tracks Only Particular Index, So If Any Stock Underperforms In That Index. The Stock Cannot Be Removed Unless It Is Removed From That Index.
Some Other Stocks Which Are Not A Part Of Index Sometimes Performs Better Than The Stocks In Index, But The Fund Manager Cannot Add The Stock Unless It Is In Index.
Some Times The Govt May Announce Good Schemes For Particular Sector, At That Time The Fund Manager Of Actively Managed Mutual Funds Will Invest In That Sector For Better Returns, But It Is Not Possible In Case Of Index Funds.
Index Funds Will Give Average Returns.
If You Observe Last One Year Returns. Index funds Given Around 40% To 50% Returns Only, But Most Of The Actively Managed Mutual Funds Was Given More Than 100% Returns Some Even Given More Than 150% Returns.
Index Funds Or Actively Managed Mutual Funds, Where To Invest ?
If You Want Average Returns And Low Risk Then Index Funds Are Best Suited For You.
But If You Want More Then Average Returns And are Ready To Take Some Risk Then Mutual Funds Are Better For You.
If You do Research And Invest In Good Mutual funds You Can Get More Returns With Low Risk.
In India, More than 70 To 75% Of Fund Managers Beat The Index. While In U.S It Is Just About 10 To 15%. Because In India There Is Lot Of Scopes For Companies To Grow And Also For Fund Managers To Find Some Good Stocks.
Overall The Actively Managed Mutual Funds Are Better Than Index Funds.