Friends, in today’s article we will understand what is an index fund. But before that, it is important to know what is index.
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The share market is a world where securities of companies such as shares, bonds, etc are bought and sold. The place where these securities are bought and sold is called the stock exchange, many companies are listed on those stock exchanges. Although there are 9 stock exchanges 2 stock exchanges are authorized by SEBI NSE (National Stock Exchange) and BSE (Bombay Stock Exchange).
These are the two largest and most famous stock exchanges. There are about 5000+ companies listed in BSE and 1600+ companies are listed in NSE, so you cannot keep track of the shares of every single company. This index is created. In which some of the top companies are included, this index gives you an idea of the market. There are two popular indices in India, Sensex and Nifty 50.
The name of the top 30 groups of BSE is Sensex and the name of the top 50 groups of NSE is Nifty50. The index fund is a category of Mutufund but unlike Mutufund, it does not have any expert team to manage the fund. If we invest in share markets like Mutufund or similar, then we do research on some particular companies, and according to that we invest in their shares, this is an example of an active fund but an index fund is a passive fund where you need so much research and experts. There is no need to invest here on any one stock exchange.
How Does Index Fund Wors?
Let’s assume you have invested in your Nifty 50 index, now the companies whose weightage in Nifty 50 will be 11.21 % for example HDFC is 11.17 % of Reliance is 7.21 % of Infosys, then your investment is similar to Nifty 50 companies. Like Active Fund, it will not happen that if money is invested in a particular company and its share price starts going down, then you will also lose, here one company does not mean that your investment is on the entire index. If one company goes down, the other company can balance it by going up. Overall your return depends on the positions of the entire market.
There is not much difference between the index fund’s return and the benchmark, the benchmark is used in the case of mutual funds, it also tells the average in the same way. The performance of your fund remains around the performance of the index, the closer it is to the better, but the difference in it is called tracking error. Fund managers’ efforts are to reduce this tracking error. The risk factor in investing in index funds is very low.
There are two types of index funds
- A short-term index fund
- A long-term index fund
Investment in a short-term index fund is taken out within 1 year, where the investor tries to get the return as much as the performance of the index of the stock market, and a long-term index fund is for the long-term, long term index fund The investor gets tax exemption at the time of return.
Commonly Used Mutual Fund Terms
Which People Should Invest In Index Funds?
Index funds are a good option for those people who are unable to stay updated with the daily fluctuations of the stock market or do not want to be updated daily. At the same time, index funds are a good option for those people who want to take advantage of the return even if the profit is low and do not want to take a lot of risks.
Things to know before investing in index funds
- Risk Associated: Risk is definitely low in index funds but it is not risk-free, many times it gets lost in the situation of a market crash.
- Cost: You should go for the fund where the expense ratio is low. An expense ratio is a fund charge that the fund house has to pay for fund management services, a low expense ratio can give you high returns.
- Return: For investment, one should go towards those funds where the tracking error is minimum, if the tracking error is less then the fund performance will be good.
- Investment Horizon: Investment Horizon means the total length of time for which you hold the securities i.e. for how long do you invest, it depends on the market fluctuations of your investment in short-term investments. Could be a problem. Immediate fluxation is not a problem in the long term and you can get good returns too.