What Is Index Fund in India?
Index funds are a type of equity mutual fund that can invest only in market indices like Nifty 50, Sensex, Nifty Next 50, Nifty 100, etc. It is also called passive funds.
This fund was introduced globally in the year 1975 by the legendary value investor John C. Bogle. Vanguard 500 Index was the first managed index fund.
In India, index funds are becoming an alternative to actively managed funds. The reason behind this is, that in the last 3 years major index funds have performed better than active funds.
Even the Emperor of value investing Warren Buffet too recommends passive funds than investing in active funds.
Indices in India
The index is termed to describe an overview of a nation’s share market condition. We have two stock exchanges in India that invest in the equity market. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
The index of NSE is known as NIFTY. This NIFTY is nifty 50, which holds 50 top companies’ stocks in their portfolio. Since there is more diversification most people trade at Nifty.
The index of BSE is known as SENSEX. Sensex holds 30 top companies’ stocks.
In simple terms, the values of both indices will be similar. This shows the bullish and bearish behavior of our stock market.
Demerits of Active Funds
- Equity is not as easy for everyone due to its risk appetite.
- Hence, we choose mutual funds, which are managed by a fund manager. Mutual funds have diversification of stocks, but all the shares will be decided by fund managers only.
- These active funds have a huge expense ratio in both regular and direct investments;
§ Regular Funds – 1.5% – 2.5%
§ Direct Funds – 0.7% – 1.5%
- Since it needs active management, the risk involved is moderately high. Investors will not have any idea when the fund NAV falls.
Importance of Index Fund
- Since it is a passive fund, it has no major role for the fund manager.
- Investors who don’t have time to learn and analyze on market can ultimately choose an index fund and invest for 20 years.
- The fund has to be similar to Nifty Index holdings. So, we can track performance and market conditions.
- Many Index funds offer an expense ratio of 0.1%. This will increase the performance of the fund.
- Also, we can analyze when to quit and when to start investing depending on market conditions.
- The index fund is useful for people with zero knowledge of equity and looking for a fair return of 10-12% per annum.
- Over the last 5 years, Passive funds have surpassed many active 5-star funds.
Conclusion
- Investing in equity will yield a good return to overcome the inflation rate.
- It is wise to choose between the funds.
- Investing in lower expense ratio funds will give you an increase in return.
- Passive funds have shown a good return when compared to most of the actively managed funds.
- With the difference between the UTI Nifty Index fund (Passive) and the HDFC Top 100 fund (Active). The passive fund has shown more than 10% higher return than active funds.
- Most of the active funds are still negative in the last 3 year’s performance.
- When you plan to invest in mutual funds, always prefer Index funds.