The term Index fund has got quite popular nowadays. Everyone is curious to know what is an Index fund and what it does. An Index fund is a type of mutual fund which as the name suggests invests directly in an index. An Index fund doesn't invest in 2 or 3 stocks but on all the stocks that are part of a particular index. The base indexes in which we can invest are BSE Sensex and NSE Nifty.Index fund differs from all other mutual funds in the way it invests in the equity market. If you take an index fund which invests in Sensex index, it buys all the shares of the companies in Sensex in the same proportion as they are listed. Thus, if one of the stocks go up while the other goes down, it will not have a greater impact on the whole fund.
Advantages of Index funds
Mutual funds can be classified into two categories based on the risk factor and equity management. They are actively managed funds and passively managed funds. Actively managed funds are managed by some fund managers and research teams who decide which stock to invest. There is no need for such research in passively managed funds. An Index fund is an example of a passively managed fund. The biggest advantage of the index fund is its lower management expense ratio. The expense ratio of most index funds ranges between 0.2-1% while for actively managed funds it ranges between 1-2%. This is because index funds invest in the stock market as a whole and not in any particular stocks. Thus, this lower expense ratio helps in increasing the profit value. The other advantage is the lesser risk factor. Since it doesn't depend on any single stock, the probability of losses is also minimized.
Index funds around the world
Index funds have turned out to be a major source of investment for people all around the world. Their popularity increased when Warren Buffet, one of the wealthiest persons in the world also endorsed investing in index funds. Hence, a lot of people have started investing in index funds and are getting some good profits.
Index funds in India
Over the last few years, index funds have gained popularity in India. In India, the indexes in which people can invest are BSE Sensex and NSE Nifty. There are lots of debates going on trying to find if index funds are a good form of investment in India. It is because unlike the USA or Britain, India is an emerging economy. The number of companies listed in the stock exchange is very few. Thus, if you compare the returns of actively managed funds and index funds, active funds give better returns. Since the number of stocks is less, fund managers are able to predict the price of shares here and get more profit. Thus, in the current scenario, active funds give more profit than index funds.
But people invest in mutual funds with an eye on their future. Hence, as our economy grows, it will be difficult to predict the outcome of the stock market. Thus, passive funds will have an advantage in the coming years.
Let us see the top 5 index funds and their returns,
Index funds are most suitable for people who are investing in mutual funds for the first time and are not willing to take any risk. It is also useful for people who are investing for pension purpose or are looking for a long-term investment of 15+ years. With the world markets slowly moving towards index funds, this is the best time to invest in these funds that offer a lot of promise.