What is an Index Fund?
Index funds are a part of a mutual fund that tries to imitate the portfolio of an index. An index fund is also known as an index tracker fund. Those who invest in index funds in India are aware of the benefits of diversifying their portfolio across various sectors. Index funds are popular among investors because they try to match the performance of their underlying indexes, such as the Sensex or the Nifty. All of the stocks in these indices will somehow be represented in their investment portfolio. It ensures that the performance is similar to that of the index being tracked. Its key selling point is its low expense ratio.
Since index funds are not actively managed, they have low expenses. They do not seek to outperform the market but rather track an index. They support investors in managing or balancing the risks in their investment portfolio.
How Does an Index Fund Work?
An Index Fund in India tracks benchmarks like the Nifty; it has a portfolio of 50 stocks that includes Nifty in the same amount. These funds are a group of securities that define a market segment that can be bond market instruments or equity-oriented instruments like stock. In India, the most known indices are NSE nifty and BSE Sensex.
Index funds are classified as passive fund management since they monitor a certain index. The fund management determines which equities must be purchased and sold based on the composition of the underlying benchmark. Unlike actively managed funds, index funds do not have a separate team of research analysts to identify opportunities and select stocks; due to this, index funds track an index.
While an actively managed fund tries to outperform its benchmark, the role of an index fund is to mirror the performance of its index. Index funds often produce returns close to or equal to the benchmark. However, there may be a little significant difference in performance between the fund and the index. It is known as a tracking mistake. Due to this mistake, the fund manager must solve the tracking error as soon as possible.
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Who Should Invest in Index Funds?
This decision to invest in mutual funds depends on risk tolerance and investment objectives. These funds are more suitable for risk-averse investors seeking predictable returns. These funds do not necessitate extensive tracking. Like, if you want to invest in equities but don’t want to accept the risks associated with actively managed equity funds, you might choose a Sensex or Nifty index fund. These funds will provide you with returns corresponding to the index’s upside. However, if you want to outperform the market, you might invest in actively managed funds.
In the short run, index funds’ returns may match those of actively managed funds. However, the actively managed fund outperforms in the long run. Investing in these funds is appropriate for long-term investors with a time horizon of at least seven years. These funds include market and volatility concerns; thus, they are only suitable for people willing to risk. Those who are looking to invest in Index funds can visit the Axis Mutual funds to see the different Index Funds available for investors to invest. Axis Mutual funds also have a mobile app so that investors can access it anytime and anywhere.
Benefits of Index Funds?
Here are some of the benefits of investing in index funds:
- As the Index fund imitates its underlying benchmark, there is no need for a team of research experts to assist fund managers in selecting the best stocks. Furthermore, there is no active stock trading. All of these variables contribute to an index fund’s low management cost.
- An index fund’s asset allocation would change if the asset allocation of its underlying asset changed. As a result, the fund manager would not trade securities regularly, keeping the expense ratio low.
- An index fund’s stocks are often well-established firms unaffected by market movements. It means that the index funds’ returns are stable, and the risk of losing the entire investment is essentially non-existent. Index funds are appropriate for investors willing to accept some risk in exchange for limited returns.
Things to Consider When Investing in an Index Fund in India
As index funds mimic an index, they are less vulnerable to equity-related volatility and risks. If you want to create high returns in a rising market, index funds are an ideal choice. However, you will need to move to actively managed funds during a market crash. During a market crash, index funds tend to lose value.
Index funds do not seek to outperform the benchmark but rather imitate its performance. However, the results generated may not be on par with the index due to tracking issues. Deviations from real index returns are possible. As a result, before investing in an index fund, it is best to shortlist funds with the lowest tracking error—the smaller the errors, the better the fund’s performance.
Cost of Investment
Index funds often have lower expense ratios than actively managed products. Index funds’ portfolios are generally passively managed, and the fund manager is not required to devise any investment strategy. As a result, the expense ratio differs. If two index funds track the Nifty, their returns will be comparable. The expense ratio will be the only change. The fund with the lowest expense ratio will yield larger returns on investment.
How to Invest in Index Funds in India?
Thanks to paperless documentation and a hassle-free approach, investing in index funds in India has become easier than ever.
Step 1: Log in to Axis Mutual Funds app/ websites.
Step 2: After the login, you need to complete your e-KYC verification which you do through their website/app in less than 5 minutes.
Step 3: Determine the funds you want to invest in based on your financial objectives and then choose your favourite index fund among the hand-picked mutual funds that Axis Mutual Fund provides.
Step 4: With the help of the Axis app you can enter the amount of investment and period of investment in the mutual funds sip app to check the estimated amount.
Step 5:Choose the appropriate fund and transfer the required amount.
Step 6: You can also set up a standing instruction with your bank if you want to invest monthly through a SIP.
Axis Mutual Funds also provides information about all their schemes and provides detailed information if you need more clarification. With this, you are set to invest in the mutual funds sip app at any time and anywhere.
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