Index mutual funds invest in a specific type of stock belonging to a particular index in the stock market. The funds keep your average expenses lower since they do not require active management. As a result, you automatically get more profits.
In case you plan to invest in an equity mutual fund, but not quite sure about how it might benefit you, an index fund turns out to be a feasible option. An index fund is a type of fund that replicates an equity index by investing in stocks tracked by the index.
Indexing is considered to be a passive form of fund-management that is highly beneficial than most of the actively managed mutual funds. When you invest in an index fund, it is known as passive investing. A major advantage of such an investment is a lower management expense ratio.
Every stock weighs differently in an index. Therefore, the portfolio of the index fund rightly reflects the index. According to a few experts, an index fund is independent of the ability of a fund-manager, his character or his longevity. As a result, Index mutual funds are suitable for investors who are willing to take a market risk but not a fund-manager risk.
Index fund managers replicate the benchmark index performance and therefore do not require the assistance of a research analyst in the stock-selection process. Actively managed funds, on the other hand, do require a research analyst team. In this case, the cost of fund management is passed on to the shareholders.
As the portfolio relies on a particular index, you save on the transaction cost and the brokerage. Also, as the fund-manager plays a very limited role, the fund management charges are minimal, cutting down the rates of expense ratio lower than that of the funds being managed actively. In the case of index funds, the average expense ratio is 1-1.5%, and for an actively-managed fund, it is 2-2.5%.
Usually, a normal fund is bought or sold at the net asset value. However, this is not the case with index funds. You can buy or sell the fund at any instance of time keeping in consideration the current price.
There are several reasons why you should opt for an index mutual fund, for instance, the overall expense involved is much lower. Also, it has a limited recurring expense. The fund is rightly tailored to mirror the market-performance of the companies in the Nifty index.
Index funds have always outperformed the actively managed funds, as a result of which the asset flow has witnessed a significant growth in the index fund products.
That being said, here’s a word of caution. In case you have never invested in an index mutual fund before, it would be wiser to walk up to a financial advisor first who can help you understand the benefits of various schemes available in a better way. Compare the available plans, and then you can choose the one that you feel matches your personal preference.
Disclaimer – “Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing.”