Passive investing indicates that the fund manager invests in the same assets and proportions as the underlying index, with no changes to the portfolio’s composition. The top performers in the index funds category are helping you reap the highest returns.
What are Index Funds?
Are you wondering what an index fund is? A mutual fund that tracks the performance of an index is known as an index investing fund. Depending on the source, this kind of mutual fund is also known as index-tied or index-tracker funds. If you want to mimic the performance of a stock market index like the S&P BSE Sensex or the NSE Nifty 50, an index fund is your best bet.
Many investors also believe in the passive investment strategy that seeks to replicate the benchmark index returns. So, the investors who know what Index Investing is, know that this investing offers great diversification and lowers expenses and fees immensely.
In other words, the holdings of index funds meaning would mirror those of the underlying index it tracks. Due to this, the returns of index funds are identical to those of the underlying index. Since index funds are not actively managed, they offer a low fee structure.
Investors in these funds aren’t looking to beat the market; instead, they’re tracking an index. Investors may use them to manage and balance the risk in their portfolios more effectively.
To replicate the Nifty 50, broad-based index funds must own those 50 stocks at the same weightings as the Nifty itself. A market sector index is classified as securities that represent that sector. These investments might be in the bond market or the stock market. India’s most popular stock market indices are the BSE Sensex and the NSE Nifty.
One of the most common questions witnessed across the web is what is a low-cost index fund? Low-cost index funds are in high demand lately and are known as passive fund management since it follows a particular index, likely the top-performing stocks and bonds. Based on the composition of the fundamental benchmark, the fund’s management decides which firms to purchase and sell. Research analysts aren’t employed by an index fund, unlike those employed by actively-managed funds.
It is important to extensively know index funds before choosing the category of these funds you think will outperform their benchmarks. There is, however, a tracking error, which is the difference in performance between the fund and the index. The fund managers must make every effort to minimise tracking errors.
Did You Know?
- Investors with a long-time horizon might consider index funds’ meaning and long term gains. Short-term volatility is common, but long-term returns of 10% to 13% may be expected over seven years.
Key Takeaways
- A mutual fund that tracks the performance of an index is known as an index fund. Other names for these mutual funds are index-tied or index-tracked mutual funds.
- The index funds are offered with a low fee structure; they are not managed actively. Instead of outperforming the market, these funds follow certain preset rules so that funds can track a group of direct investments.
- The fund’s performance may differ from that of the index.
- As a rule, the assets held by an index fund are those of well-known companies unaffected by market fluctuations.
Who Should Invest in Index Funds?
A mutual fund investment depends on your financial goals and tolerance for market risks. An actively managed investment fund is when the fund’s money is invested by a manager or management team. In contrast, a passively managed fund merely tracks a market index. It lacks a management team capable of making investment choices. Investors looking for a steady income stream can consider index funds.
These funds don’t need constant monitoring. To avoid the associated risks with highly volatile equity funds, consider investing in an index fund such as the Sensex or the Nifty. If the index rises, so will the value of these funds. Therefore, the risk involved in index funds is minimal compared to equity funds, which allows an investor to follow the same direction as the market’s sentiments.
These products may be of interest to long-term investors with a seven-year investment horizon. These investments are ideal for people with a higher capacity to take risks due to market fluctuations and volatility uncertainties.
Index funds are among the safest equity funds because of their holdings in blue-chip companies. These investments represent companies having a solid track record. Thus, index funds provide comprehensive stability in the market because of their lower volatility. The benchmark indices of India, including S&P, Sensex, Nifty, and BSE, fared impeccably over the last three decades.
Several issues confronted them at the time, such as the 2008 recession, the emergence of several illnesses (such as Zika, Ebola and H1N1), and geopolitical tensions across the globe. Despite these challenges, the indices have seen substantial growth since their initial phase.
Did You Know?
- The same tax rules apply to index funds to any other equity fund. Your marginal tax rate applies to index fund dividends, which are then included in your taxable income.
Top Index Funds
| Mutual Fund | 5 yr Returns | 3 yr Returns | Min. Investment (Rs.) |
| Sundaram Smart NIFTY 100 Equal Weight Direct Growth | – | 16.19% | 5000 |
| UTI Nifty Next 50 Index Fund Direct Growth | – | 14.95% | 5000 |
| DSP Equal Nifty 50 Fund Direct Growth | – | 14.85% | 500 |
| IDBI Nifty Junior Index Fund Direct Growth | 8.12% | 14.54% | 5000 |
| ICICI Prudential Nifty Next 50 Index Fund Direct Plan Growth | 8.19% | 14.53% | 100 |
Word to Remember
Indexing: To know what index funds are, it is imperative to know what indexing is? It is a kind of passive investment, i.e., without active market management, in which a portfolio is built. It also refers to a collection of investments utilised by an investor to make a return while saving money or assets.
Conclusion
Going through the entire guide would have helped you know what index funds are?
The only reason why index funds mean lower fees is that they are predictable assets that are allocated and managed passively. Moreover, the low cost-to-income ratio is achieved by limiting the frequency of trading assets. An index fund’s investments often consist of well-known companies unaffected by short-term volatility in the market.
If this is true, index funds manifest that investors are at low risk of losing the full amount invested. Investors willing to take on some personal risk in exchange for modest returns might consider investing in an index fund.
Did You Know?
You will recognise long-term capital gains when you sell your fund units after a one-year holding period. This income is not subject to taxes up to a yearly limit of Rs. 1 lakh. Over this, income is subject to a 10% tax rate, with no indexation allowed.
FAQs
Index funds state that investors may lose money since they are market-linked products. However, historical data shows that investing in index funds almost removes the risk of long-term loss.
To begin, devote 10-15% of your portfolio to Index Funds. This will result in a solid mix of passive and active investing.
Index funds are a better alternative for most investors than individual equities. They provide a low-cost technique to gain market presence. Furthermore, since you have a comprehensive portfolio rather than just a few firms, the risk is decreased.
An index fund aims to replicate the performance of its selected index by investing in the same proportion of the index’s shares. As a result, the returns from even the greatest Index Funds in India would be nearly lower than the index’s selected index.
The type of index the scheme tracks can determine your investment length in an Index Fund. If you invest in an index mutual fund that follows an equity-oriented index such as the NIFTY 50 or NIFTY 100, you must hold it for at least five years. Your assets will have enough time to grow in this manner.
Also read about NAV in Mutual Funds on Investment Simplified.
