6 Things to Know About Index Funds: When it comes to invest in the mutual funds the name comes of the index fund. The index fund is that fund in which the investor is looking at a long term and less risky form of investment. The success of the index fund depends on the low volatility and the choice of the index. Many well known indices use the NSE indices funds, the detail of some indices are like Birla Sun Life ETF, Edelweiss ETF in banking, HDFC Nifty ETF, Kodak Nifty ETF, LIC MF ETF.
Top index fund are those which track the composition of popular benchmark indices such as Nifty 50. Unlike actively managed fund these passive fund have lower expense ratio but limited scope out performance relative to the benchmark.
How do index funds work?
When an index fund tracks the benchmark like Nifty, the portfolio will have the top 50 stocks which are available in Nifty50 stock in the same proportions. An index is group of securities which defines a market segment. These securities could be bond market instruments or equity oriented instruments like stocks. The most popular indices in India are BSE Sensex and NSE Nifty. Since Index fund track the particular index they fall under the passive fund management.
Actively managed funds have potential to beat the benchmark, and the index fund’s role is to match the performance to that of the index. Index fund typically deliver returns typically more or less equal to the benchmark.
Who should invest in the index funds?
Index funds are suitable for the investors who are reluctant to take the risk, and those investors who wish to have the predictable returns. These funds do not require the extensive tracking. These funds are suitable for the investors who do not want to go into the actively managed funds. Index fund tend to lose their value during a market downturn. Hence it is advised to have a mix of actively managed fund and index fund in your portfolio.
Risk tolerance should be considered
Among 6 Things to Know About Index Funds the risk tolerance is the main. Since index funds map an index, they are less likely to suffer from the volatility risks. If you wish to get high returns amid the rallying market the index returns is most suitable.
Return factor needs to be catered
Unlike the actively managed funds, Index funds track the performance of the underlying benchmark passively. These funds just replicate the performance of the index.
Cost of investment in Index funds
The cost of investment in the index fund is comparatively less than that of the actively managed funds. These funds tends to fluctuate in the short term but give healthy return in the long term.