Looking to invest in stocks and grow your money with time? Index Funds
may be a suitable starting point for you. Investing in Index Funds is
like having your own personal allocator that’s accessible and easy to
work with and cost effective.
Hence, investing in Index Funds is one of the best ways you can invest your money and grow it over time. Let’s look at why investing in Index Funds is a great idea for you.
What are Index Funds?
Mutual funds schemes that track a market index are called Index Funds. The objective of Index Funds is to replicate market returns, as provided by the specific index. They are passively managed; the fund manager does not select securities within the portfolio. Instead, the investment is made in securities from the market index in the same proportion. Thus, Index Funds aim to provide returns in line with the index they follow.
Is investing in Index Funds a good idea?
There are several factors that make investing in Index Funds a great
idea. One of the major reasons why you should invest in Index Funds is
because it’s one of the most efficient and cost-effective ways to invest
As the fund imitates its benchmark index, there is no requirement for research analysts to help fund managers pick the right stocks and actively manage it. This lead to low management costs of an Index Fund. Further Index Funds replicated the composition of an index which is constructed on defined parameters. This removes the individual bias which can affect investment decisions.
Why opt for investing in Index Funds?
Since Index Funds are based on a specific market index, their returns
are roughly in the similar range to those offered by the index subject
to expense and tracking error. Therefore, if you prefer to invest in the
market with comparatively less risk, these funds can be ideal choice for
Simple and easy to understand: Among the varied
choices available to investors, Index Funds are simple and easy to
understand and can prove to be a good start to any investment. The
primary reason why they’re so simple is that fund managers do not
involve themselves with stock performance in the market. All they
have to do is to construct and rebalance their portfolios in line
with the benchmark index.
Low Cost: As compared to actively managed schemes,
Index Funds come with relatively lower costs. Since Index Funds
imitate the composition of the underlying benchmark index, they
eliminate the need for research analysts that typically help fund
managers choose the right stocks. Also, there isn’t any active
trading. All these aspects influence the low managing cost of an
Eliminate bias: Index Funds work on a fixed, rule-based investment method. The fund manager gets a specific amount to be invested in Index Funds of various securities. This does away with any human discretion/bias while taking investment decisions. They provide broad market exposure; investing money in a proportion similar to that of an index ensures that the portfolio is diversified across all sectors and stocks. Thus, the investor can avail of returns on a much larger segment through a single index fund. For example, say you decided to opt for a Nifty Index Fund. In that case, you get exposure to 50 stocks from 13 different sectors, such as pharma, financial services and more.
Who should invest in Index Funds?
Each individual has their own investment objective, financial profile and risk appetite. Index Funds are suitable for investors who are looking for a simple and cost-effective investment solution. Further, investors who are beginning their investment journey can consider Index Funds as they track market returns and does not require a lot of research.
SIP is a feature offered for a disciplined investment of a certain amount on a pre-decided date in a specific mutual fund scheme, regularly over a period of time.
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