The Ultimate Guide to Index Funds: Benefits and Top Picks
by Admin
Account indices have received support from investors and market individuals due to their easy operational method, cheap charges, and index performance replication. In this guide, I will explain what index funds are, why one should invest in them and share some of the best investments for the Indian investor.
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What Are Index Funds?
Index funds are a type of mutual funds investment plan investing in a portfolio similar to that of a selected index, including either the Nifty 50 or the Sensex. Such funds involved deal with the purchases of securities constituting the index hence providing a diversified portfolio deal with minimal management.
How Index Funds Work
| Aspect | Description |
|---|---|
| Portfolio Composition | Mimics the holdings of a specific index (e.g., Nifty 50, Sensex). |
| Management Style | Passive management, meaning the fund’s portfolio is not actively traded. |
| Expense Ratio | Lower compared to actively managed funds due to less frequent trading. |
| Risk Level | Moderate, as it reflects the market’s overall performance. |
Benefits of Investing in Index Funds
1. Low Cost
Without doubt, low expense ratio remains one of the major benefits index funds provide to their users. Due to their passive management style the funds attract significantly lower management charges as compared to actively managed funds.
2. Diversification
This means that index funds will by default, spread your investment across all the stocks in the particular index. This also helps in managing risk specially the risk related to investment in stocks.
3. Consistent Performance
Since index funds receive the goal of replicating the index, the performance they deliver to the investors is consistent with the market performance. It has regularly been found that they give better results than actively managed funds in the long run.
4. Simplicity
Mainly attracting the novices or those who would prefer a mechanical approach, index funds are easy to grasp and invest in. It is enough to exclude long-term monitoring or adaptation of the portfolio to changes in the market.
Top Index Funds in India
| Fund Name | Benchmark Index | Expense Ratio | 5-Year Returns |
|---|---|---|---|
| UTI Nifty Index Fund | Nifty 50 | 0.20% | 12.5% |
| HDFC Index Fund Sensex Plan | Sensex | 0.30% | 13.2% |
| ICICI Prudential Nifty Next 50 Index Fund | Nifty Next 50 | 0.40% | 11.8% |
| SBI Nifty Index Fund | Nifty 50 | 0.10% | 12.3% |
| Axis Nifty 100 Index Fund | Nifty 100 | 0.27% | 12.1% |
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Consideration to Make Before Investing
1. Investment Horizon
Index funds are particularly appropriate to those who do not need their money frequently and are willing to have their money eaten by the dogs. It is vital to harmonize your investment horizon with this kind of strategy.
2. Risk Appetite
Though indexing is less risky to direct investment in individual shares, it is at the same time prone to general market risk. In choosing investment instruments, one has to consider one’s risk appetite.
3. Fund Performance
Despite the fact that index funds are intended to mirror the index, some might perform least a little lower because of tracking errors. One should always check a fund’s previous performance and the tracking error.
Why Choose a Reputable AMC?
The Asset Management Company often referred to as the AMC has a central responsibility for the running of the fund. It is ‘better to invest in index funds run by efficient AMCs’, that is, those with experience of delivering index fund management. Go to our AMC Page to check the various AMCs available
Top AMCs for Index Funds
| AMC | Notable Index Fund | Benchmark |
|---|---|---|
| HDFC Mutual Fund | HDFC Index Fund - Sensex Plan | Sensex |
| SBI Mutual Fund | SBI Nifty Index Fund | Nifty 50 |
| ICICI Prudential AMC | ICICI Prudential Nifty Next 50 Fund | Nifty Next 50 |
Conclusion
It’s therefore appropriate for investors who desire to invest in a low-cost, diversified and stable investment asset. It is, therefore, important that an investor learns about the benefits associated with the various categories of funds with an aim of achieving the right kind of investments for your intended purpose. To find out more about mutual funds and to use our screener tool go to Mutual Funds Screener.