Index Funds

Index funds provide investors with a cost-effective and diverse approach to participate in the financial markets by monitoring a specific market index, such as the S&P 500, reducing the need for active management. With lower expense ratios than actively managed funds, this fund provides a tempting offering for long-term investors seeking broad market exposure while reducing expenses to a minimum.

Small expense ratio

Low risk

Good for new investors

Long-term growth

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What are Index Funds?

Index funds have a portfolio that copies components of a stock market index such as Nifty 50 or Sensex. As per SEBI, 95% of the portfolio must be invested in stocks of the index that is being tracked. Thus, an index fund tries to generate returns by replicating the overall performance of an index.

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Advantages of Investing in Index Funds

Let us see what you stand to gain by investing in index mutual funds.

Diversification
Index funds provide investors quick diversification by owning a basket of assets that replicate a certain market index. This lowers individual stock risk since the fund is not dependent on the performance of a single firm, resulting in a more stable and diversified investment portfolio.
Risk Spread Out Across Stocks And Sectors
As index funds have a very wide portfolio, they can mitigate risks in case of market downturns. If one stock in which the fund has invested suffers, performance of other stocks in the portfolio can compensate for it.
Expense Ratio
One of the most attractive features of popular index funds is their low expense ratio. It is the fees you have to pay for the fund’s management. With a low expense ratio, you earn a lot more in returns.
Good for Long-Term Investment
Over time, many actively managed funds have struggled to regularly exceed their benchmarks. Index funds are designed to replicate the performance of a certain index. This technique frequently produces consistent and predictable returns, making it a dependable option for long-term investors seeking stable growth.
Transparency
An index fund's holdings are publicly disclosed and are often updated on a regular basis. This openness enables investors to understand exactly the assets they hold within the fund. In contrast, some actively managed funds may not have as visible or regular portfolio updates.
Accessibility for Small Investors
Index funds often have lower minimum investment requirements, making them more accessible to a wider spectrum of investors. This democratisation of investing options enables those with less wealth to engage in the market and construct a diverse portfolio without making a large initial commitment.

Who Should Invest in Index Funds?

Now we will see who are the investors for whom index funds will be a perfect choice.

Risk-Averse Investors
As an investor, you may be afraid of market risks. In such a case, you can invest in index funds. The diversified portfolio of these funds greatly helps to mitigate risks.
Cost Conscious Investors
Index funds simply copy the composition of the stock market. Thus, you don’t have to pay very big fees for their management. It is one of the cheaper mutual funds you can invest in.
Diversity in Portfolio Seeking Investors
If you want to invest in a variety of stocks across the stock market, you can invest in index funds. Thus you get a very broad exposure across the stock market.
Unbiased Investing
Unlike other mutual funds, there isn’t much scope for bias in index mf. A fund manager has to invest as per the composition of the stock market index. The manager’s preferences can’t influence the portfolio.
Long-Term Investors
Individuals with long-term investing horizons benefit from index funds' stability and growth potential, since they mirror the broader market trend. This concept supports a gradual approach to wealth growth.
Busy Professionals
Index funds are a practical solution for people who don't have time to handle their investments actively. They need little supervision and do not required frequent monitoring or modifications.

Points to Consider before Investing in Index Funds

Here are some of the factors you should consider before investing in index funds.

Expense Ratio
The lower the fees you pay, the higher will be the return on index funds. So select the fund with the lowest returns.
Tracking Error
It refers to the difference between the return on index funds and the index it is tracking. You must invest in the index fund with the lowest tracking error.
Investment Horizon
Index funds are best suited to long-term investment. It helps to minimise the impact of market downturns. So make sure to invest for the long haul.
Risk
Index funds are subject to market risks. Your investment portfolio should be able to make the most of the ups and downs of the market.
Financial Goals
Index funds yield good returns over the long term. Make sure your investment is aligned with your financial goals.
Tax
Short-term or long-term capital gains tax will be charged on your returns depending on how long you stay invested.

Limitations of Index Funds

Here are some limitations of index funds you must be aware of before starting your investment journey with such funds.

Market Volatility
As index funds track stock market indices, they can suffer losses in a bearish market. Thus all your gains can be wiped out during a market crash.

Tracking Error

There can be a divergence between how much return an index and an index fund generate. For the best returns, the tracking error needs to be minimised.

Poorer Returns Than Active Funds
Active funds try to outperform the markets whereas index funds simply try to replicate them. Thus, active funds can outperform index funds.

How to Start Investing in Index Funds with INDmoney

Let us see how you can invest in index funds with INDmoney.

Step 1
Download the INDmoney app and create your free investment account by completing your KYC ( Know Your Customer).
Step 2
Once your Free investment account is ready, you can either search for an Index fund or go to the mutual fund section and tap on Index funds.
Step 3
Choose an Index fund by looking at aspects like past returns, volatility, downside capture ratio, AUM, Expense ratios and underlying stocks and sectors.
Step 4
You can choose to set up SIP in Index funds or even invest as lumpSum. Once you are on the individual Index Fund page click from the bottom “One-time” for lump sum investment or “SIP” for systematic investment plan.
Step 5
Choose the amount that you want to invest as SIP or LumpSum.
Step 6
Set up payments. If you choose to set up SIP in Index funds, you can do a free automatic pay set up via bank mandate or UPI. If you choose to invest in lumpsum (one-time) then you can pay via UPI, netbanking, NEFT or RTGS.

Should You Choose Index Funds?

If you are looking to invest in mutual funds for the long term, you can invest in index funds. Under good market conditions, they can create good returns. They have low fees and provide a diversified investment basket. You can visit the INDmoney website or download our app to invest in these funds.

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Frequently Asked Questions

You can visit the INDmoney website to find out the best index funds to invest in 2024.

They are best for long-term investment. You should invest for at least 7 years.

Yes, they are subject to market risks. Since the market is highly volatile for such funds, the risk involved is also high.

As per SEBI, 95% of the portfolio is invested in stocks of the index which is being tracked.

You can expect good returns from index funds.

Some of the factors you should consider are:

Investment horizon
Tracking error
Financial goals
Performance of the stock market index
Expense ratio

As index funds mimic the market, there is nothing the fund manager can do to change the portfolio even if some particular stocks in the portfolio fare poorly.