Index funds is a type of mutual fund with a portfolio made to manage or track the components of markets index. These funds provide broad market exposure, low portfolio exposure, and low operating costs. These funds follow specific rules and standards which do not alter whatever the state of the market. They are also known as exchange-traded funds ETFs).
Index fundsare also called passively managed funds which include no fund manager. The main advantage of such a strategy is lower management costs. These are generally considered as ideal core portfolio holdings for retired people. The idea of Index funds has not worked well in India until now. But, they are a huge in the USA. Since 2007 to 2008, there has been a slight growth of 0.2% to 0.8%.
If the idea of buying Index funds appeals to you, follow the tips below before making an investment.
Each stock has a different weighting in the index. The portfolio of an Index funds is also allocated in the same way. For example, if Reliance Industries has a weight of 10% in an index, a fund in the same index will also allocate 10% of the portfolio. These kinds of the portfolio are ideal for people who do not wish to take the fund manager risk.
Many believe that Index funds will take the time to become popular in India. The returns from Index funds are generally lower, hence investors try to avoid such funds. But it can be a good investment option for investors looking to minimize risks in doing so.
People interested in investing Index funds are thrilled by the Employees' Provident Fund Organisation's decision to invest in equities. This is because all the Employees' Provident Fund Organisation’s investments in equities will go through passive mutual funds.
The latest trend of cost cutting by the fund houses might also force them to cut the ETF's expense ratio. The competition is getting tougher in this space as well. The private trusts that manage the employee provident fund are opening up to the investment in open-ended funds.
Index funds used to charge full expense ratio before SEBI mentioned lower expense ratios for passive funds. Now the scenario has changed and the outperformance of the other types of funds have also seen changes.
Now, the question remains if the actively managed funds continue to rule the market or will the Index funds gain some market share as well.